Do I Have to be Reasonable?: The Right to Arbitrarily Restrict Transfer of Occupancy and Mineral Leases

• Author: Blake A. Watson
• Position: Professor of Law at the University of Dayton School of Law
• Pages: 28-101

DO I HAVE TO BE REASONABLE?: THE RIGHT TO

ARBITRARILY RESTRICT TRANSFER OF OCCUPANCY AND

MINERAL LEASES

BLAKE A. WATSON*

You desire to enter into a long-term commercial lease and are equally

interested in four available sites. The terms of the proposed leases are

identical except as to the right to transfer:

Lease 1: This lease may not be assigned, subleased, or

otherwise transferred.

Lease 2: This lease may not be assigned, subleased, or

otherwise transferred without the consent of the lessor,

which the lessor may withhold in its sole discretion.

Lease 3: This lease may not be assigned, subleased, or

otherwise transferred without the consent of the lessor.

Lease 4: This lease may be assigned, subleased, or

otherwise transferred with the consent of the lessor.

You are also a landowner with two offers to lease your land for oil and

gas development. Both proposed leases initially contain the following

provision: “This lease may be assigned, subleased, or otherwise

transferred.” In response, you countered with language that says, “This

lease may not be assigned, subleased, or otherwise transferred without the

consent of the lessor, which the lessor may withhold in its sole discretion.”

Neither prospective lessee, however, is willing to accept this italicized

language and after further negotiations, you are presented with the

following two choices:

Lease A: This lease may not be assigned, subleased, or

otherwise transferred without the consent of the lessor.

Lease B: This lease may not be assigned, subleased, or

otherwise transferred without the consent of the lessor,

which consent shall not be unreasonably withheld.

What to do? As a tenant, you should select the commercial lease that

least restricts your ability to transfer.

1

But do any of these leases actually

Copyright © 2019, Blake A. Watson.

* Professor of Law at the University of Dayton School of Law. All writings and

mistakes are the author’s own.

28 CAPITAL UNIVERSITY LAW REVIEW [47:27

restrict the right to withhold consent? Lease 1 expressly prohibits

transfers, but the lessor could choose to waive the provision.

2

The other

three leases suggest that transfers are permitted, but Lease 2 makes it clear

that the decision to approve a transfer request is left in the lessor’s “sole

discretion.”

3

As discussed below,

4

some states have held that the lessor’s

veto power in Lease 3 and Lease 4 is constrained by an implied

“reasonableness” standard.

5

Other states, however, continue to adhere to

the traditional view that the lessor, in both Lease 3 and Lease 4, “may

arbitrarily withhold his assent without giving any reasons, and in granting

his assent may impose such conditions as he sees fit.”

6

In the “traditional”

states, consequently, all four leases are the same; the lessor has total

control over whether to permit a transfer.

The choice between the two oil and gas leases appears more

straightforward. As a landowner, you want to maximize your control over

the transfer of the oil and gas lease and therefore would select Lease A,

1

You would likely prefer a lease that expressly states the “lease may be assigned,

subleased, or otherwise transferred.” Prospective lessors, however, will not agree to an

unrestricted transfer right.

2

See Susan E. Myster, Prot ecting Landlord Control of T ransfers: The Status of “Sole

Discretion” Claus es in California Commercial Leases, 35 SANTA CLARA L. REV. 845, 877

(1994–95) (noting that, if the lease contains a provision prohibiting a transfer, “the landlord

would be free to unilaterally waive this provision.”).

3

See Nev. Atl. Corp. v. WREC Lido Venture, LLC, No. G039825, 2008 WL 5065977,

at *1 (Cal. Ct. App. Dec. 2, 2008) (the lease gave the landlord the right to withhold consent

to a proposed assignment “for any reason whatsoever or for no reason.”).

4

See infra Section IV.

5

See, e.g., Dick Broad. Co. v. Oak Ridge FM, Inc., 395 S.W.3d 653, 656–57 (Tenn.

2013) (“[W]here . . . the agreement is silent regarding the anticipated standard of conduct in

withholding consent, an implied covenant of good f aith and fair dealing applies and requires

the non-assigning party to act with good faith and in a commercially reasonable

manner . . . .”).

6

Abrahamson v. Brett, 21 P.2d 229, 232 (Or. 1933). See also infra Section III (The

lessor with absolute discretion to grant or withhold consent can choose to condition consent

on the payment of a “transfer” fee or an upward adjustment of the rent; this would not be

permitted if the right to withhold consent is subject t o a reasonableness standard); Julian v.

Christopher, 575 A.2d 735, 739 (Md. App. 1990) (“Where, as alleged in this case, the

refusal to consent was solely for the purpose of securing a rent increase, such refusal would

be unreasonable unless the new subtenant would necessitate additional expenditures by, or

increased economic risk to, the landlord.”).

Under the traditional view, the lessor in Lease 3 is telling the lessee “you cannot

transfer unless I say you can,” whereas the lessor in Lease 4 is telling the lessee “you can

transfer unless I say you cannot.” The end result is the same. See, e.g., Friedman v.

Thomas J. Fisher & Co., 88 A.2d 321, 322–23 (D.C. Mun. Ct. 1952) (the effect of a

typewritten provision that the lessee may sublet with consent was the same as the printed

provision that the lessee shall not sublet without consent).

2019] ARBITRARILY RESTRICTING MINERAL LEASE TRANSFERS 29

which does not include a reasonableness standard. There are, however,

two potential problems. First, it is possible that any constraint on the

transferability of a mineral lease will be held invalid as an impermissible

restraint on alienation.

7

If so, the negotiations regarding the right to

transfer are pointless! Second, even if the clause is a permissible restraint

on alienation, in states that imply a reasonableness standard, an argument

can be made that the only difference between Lease A and Lease B is that

the reasonableness standard in the latter lease is expressly stated rather

than implied. It is thus possible that Lease A—despite the absence of a

reasonableness standard—grants precisely the same transfer rights as Lease

B!

This article addresses the right to arbitrarily restrict the transfer of

occupancy and mineral leases.

8

With respect to occupancy leases, the

emphasis will be on commercial leases, although the arbitrary restriction of

7

See generally, e.g., Shields v. Moffitt, 683 P.2d 530 (Okla. 1984). In Shields, the

issue was “whether . . . [a] clause in the oil and gas lease which provides that the lease may

be assigned only with the written consent of the lessors constitutes an unlawful restraint on

alienation which renders t he restrictive clause void.” Id. at 532. The Court held that the

clause in question is “void and of no force or effect.” Id. at 533. See also infra Section II.

8

The right to act arbitrarily is equated with the right to act unreasonably. See Slavin v.

Rent Control Bd., 548 N.E.2d 1226, 1228 (Mass. 1990) (“A majority of juris dictions

subscribe to the rule that a lease provision requiring the landlord’s consent to an assignment

or sublease permits the landlord to refuse arbitrarily or unreasonably.”). See also Gamble v.

New Orleans Hous. Mart, Inc., 154 So.2d 625, 626 (La. App. 1963), writ refused, 156 So.2d

229 (La. 1963) (describing a silent consent clause as giving the lessor “the arbitrary and

absolute right, without any reason and even in bad faith, to refuse to give the permission

required by the provision.”); Henry C onklin & Sons, Inc. v. Conklin, No. 14-80-19, 1982

WL 6741, at *4 (Ohio Ct. App. Mar. 1, 1982) (stating that, under a silent consent clause,

“[T]he lessor has the full and arbitrary right to refuse t o give his consent irrespective of the

character of the proposed assignee and although actuated by mere caprice or whim.”); Paul

v. Bd. of Zoning Appeals, 110 A.2d 619, 621 (Conn. 1955) (“‘Arbitrary’ means

‘[d]epending on will or discretion,’ that is, not governed by any fixed rules or standards.”).

The lease may expressly state that the consent may be withheld “for any reason,”

“unreasonably,” “arbitrarily,” or in a party’s “sole discretion.” The lessor is the sole arbiter

of the transfer request.

Additionally, the right to arbitrarily withhold consent does not confer total freedom of

choice. See William G. Coskran, Assignment and Sublease Restrictions: The Tribulations of

Leasehold Transfers, 22 LOY. OF L.A. L. REV 405, 423 (1988–89) (noting that even a sole

discretion standard “does not allow the lessor total freedom. For example, he or she cannot

engage in prohibited discrimination.”). See also Nev. Atl. Corp., 2008 WL 5065977, at *6

(“A landlord exercising sole di scretion in considering an assignment cannot make the

decision based on illegal grounds.”); Forest Lake Facilities, LLC v. Wells Far go Bank,

N.A., No. 17-1766, 2017 WL 4736716, at *2 (D. Minn. Oct. 19, 2017) (even though the

mortgage gave the lender “sole discretion” to withhold consent to lease modifications, in

light of allegations of bad faith, the Court concluded that the breach of contract claim could

not be resolved on a motion to dismiss).