TRANSFER OF LEASEHOLD INTEREST
Most modern leases restrict the tenant’s right to transfer all or part of the leasehold interest. However, the landlord is typically able to transfer his interest freely.
Most states use an objective test in distinguishing between an assignment and a sublease. If a tenant transfers the right of possession for the entire remaining term of the lease, the transfer is an assignment. However, if only part of the remaining term is transferred, a sublease arises.
[A] Assignment Basics
An assignment creates a triangle of relationships among the original lessor, the original lessee who transfers her right (the assignor), and the person who receives the right (the assignee). Privity of contract continues between the lessor and the assignor; privity of contract is created between the assignor and the assignee; and privity of estate arises as a matter of law between the lessor and the assignee.
[B] Rights and Duties of Parties
The assignor remains liable to the original lessor for all covenants in the original lease, because they remain in privity of contract, absent a novation. The privity of estate between the lessor and assignee requires both of them to perform those covenants in the original lease that “run with the land,” and, as a practical matter, most lease covenants do so run. For example, suppose that A leases to B who assigns to C. If no one pays rent to A, both B and C are liable.
[A] Sublease Basics
A sublease creates a new landlord-tenant relationship. Suppose A leases to B, and B (as sublessor) leases to C (as sublessee). Privity of contract and privity of estate remain between A and B; privity of contract and privity of estate arise between B and C.
[B] Rights and Duties of Parties
The sublessor remains liable to the original lessor for all covenants in the original lease. Similarly, the sublessee is liable to the sublessor for the covenants in the sublease. However, the sublessee has no obligations to the original lessor.
Some scholars argue that all transfers by lessees should be treated as assignments, noting that the feudal rationale for the distinction ended long ago. The main argument for retaining the distinction is that a sophisticated transferee should be able to chose the level of liability he wishes to incur.
[A] Role of the Lease
Tenants are free to assign or sublease their interests in theory, absent a contrary agreement. However, the vast majority of leases expressly restrict this freedom. Some lease clauses flatly prohibit transfer; others give the lessor the sole discretion to approve or deny a transfer; still others require the lessor to act reasonably in deciding whether to consent.
[B] Silent Consent Clause
Complexity arises when the lease requires landlord consent but is silent on the standard for granting consent. The traditional approach applies the sole discretion standard in this situation. However, the modern trend is to require that the landlord act reasonably in deciding whether to grant or deny consent. See, e.g., Kendall v. Ernest Pestana, Inc., 709 P.2d 837 (Cal. 1985).
The landlord’s future interest in the premises (a reversion) is freely transferable to third parties in almost all cases. Lease clauses restricting this right are rare.