FEATURE ARTICLE, OCTOBER 2005

NOT WHAT YOU MAY THINK
The real meaning of the phrase “Landlord's consent shall not be unreasonably withheld.”
Michael K. Kuhn

In today's volatile business climate, commercial tenants strive for flexibility in lease arrangements. One area where commercial tenants want latitude is the ability to assign the lease or sublet the premises. When landlord and tenant negotiate the assignment and subletting clause of a commercial lease, often the outcome is the inclusion of the phrase, “Landlord's consent to assignment or subletting will not be unreasonably withheld.” This article explores the legal background of commercial lease assignment and subletting and analyzes the meaning of the oft-used phrase, “Consent not to be unreasonably withheld.”

Discussion of commercial lease assignment and subletting must begin with the statutory prohibition in Texas against lease assignment or subletting without the landlord's consent. Texas Property Code section 91.005 provides: “During the term of a lease, the tenant may not rent the leasehold to any other person without the prior consent of the landlord.”

The statute has been interpreted to cover assignments and subleases. The statute can be avoided if the lease clearly expresses the interest that the landlord's consent is conditioned or limited. Most leases are designed to override the provisions of the statute. The statute does not require written consent. Of course, the statute does not describe the means by which consent is to be granted.

Most importantly, the statute does not impose a reasonableness requirement on the landlord. Thus, a landlord need not act reasonably in withholding consent unless the lease actually imposes that duty. In the case of Vasquez v. Carmel Shopping Center1, the lease did not require the landlord to accept an assignment. The tenant was ill and wanted to sell her business and assign the lease to a third party. The landlord demanded a rent increase in exchange for his consent; the third party refused to pay. The ill tenant defaulted, and the court refused to excuse the tenant, saying there was no obligation on the part of the landlord to act reasonably. Not even the exigent circumstances of the tenant's illness require a landlord to be reasonable if the lease does not expressly require him to do so.

In the Reynolds v. McCullough2 case, the San Antonio Court of Appeals rejected the tenant's argument that there is an implied duty of good faith and fair dealing that would require, as a matter of law, a landlord to act reasonably in the context of a lease assignment. The court in Reynolds rejected the so-called “California Rule” of an implied covenant of reasonable consent. In other words, the landlord can act unreasonably or arbitrarily unless the lease says otherwise.

As a result, most tenants want their leases to require that the landlord act reasonably in the case of a lease assignment or subletting. The most common phrasing of this requirement is “Landlord's consent shall not be unreasonably withheld.” Given the frequent use of this phrase, one might think that the meaning of the phrase would have been well established by the courts by now. However, the Texas courts examining this lease clause have given it some interesting interpretations.

In the case of Pletz v. Standard Homes Company3, the lease provided that a landlord could withhold consent for “good cause.” The party intending to take the tenant's place was asked what use he intended for the premises; in response, he stated that he was going to “take a bulldozer and run through that main building.” Noting that the landlord was not happy with this prospect, the San Antonio Court of Appeals held that the landlord had good cause to refuse consent.

In the case of Grossmann v. Barney4, the lease required that a subtenant must prove acceptable to the landlord and could not make any alterations without the landlord's written consent. The original tenant wanted to sublet an automobile accessory store to a washeteria and that change of use would have required extensive alterations. The landlord refused to consent to the change and the tenant sued. The Court held the landlord was justified in refusing based solely on the planned alterations. But the Court went further and decided that “acceptable to landlord” meant that the landlord could not be arbitrary and defined arbitrary as meaning “without fair, solid and substantial cause of reason.” The Court also noted that the landlord's desire to avoid competition with an existing washateria tenant was a valid concern since the owner of a rental property may be properly motivated by considerations totally apart from rent.

In the case of Mitchell's v. Nelms5, the tenant's right to sublease was subject to the landlord's consent not to be unreasonably withheld. The Dallas Court of Appeals held that the term “unreasonable” meant that the landlord could not be arbitrary in his decision as to whether or not to permit the assignment. The Court also used the following phrases in an attempt to define “unreasonableness” in this context: capricious, tyrannical, irrational, senseless and exorbitant. These are not particularly helpful terms to practitioners but note the lack of reference to commercial standards and the absence of comparing the landlord's action to that of other similarly situated landlords.

By contrast, the United States Fifth Circuit Court of Appeals in the case of B.M.B. Corporation v. McMahan's Valley Stores6 discussed the grounds for the landlord's conditioning consent where the lease indicated that the landlord must be reasonable. The Fifth Circuit held that the evaluation of the landlord's reasonableness must be by reference to the lease itself and not subsequent events. In other words, the landlord could not lawfully condition his consent on the transferee's agreement to accept a rent increase. Some have commented that this holding seems at odds with the Mitchell's case and the other Texas state court cases, particularly since the Fifth Circuit relied on non-Texas cases to support its holding.

One landlord attempted a clever strategy to hide from the tenant the reasons for disapproving his request for approval. In the case of In re: S. R. Tjia and M.G. Soliman7, the landlord announced that the basis for his decision to deny consent was based on advice of his legal counsel and the documents involved were therefore protected by the attorney-client privilege. The tenant asked to see the documents, but the landlord refused. The court held that the attorney-client privilege would not prevent the tenant from discovering the documents. Thus, a landlord cannot claim the attorney-client privilege as a shield to keep the tenant from contesting the reasonableness of the landlord's denial.

In Nardis Sports Wear v. Simmons8, we learn that accepting rent from the tenant's assignee — regardless of whether consent is granted — is tantamount to waiver of the consent requirement and any opportunity for the landlord to disapprove is lost.

What do we conclude from this analysis? Texas courts have tended to view “not unreasonably withhold consent” as tantamount to a landlord not acting arbitrarily. The courts do not look at industry standards or compare the actions of the landlord in question to what other landlords in a similar situation or circumstance might do. However, the Fifth Circuit case adds an element of uncertainty, in its holding that seeking a variation to the lease's economic terms may be considered unreasonable. Tenants would do better clarifying — using objective standards — the circumstances in which the landlord can refuse consent.

Michael K. Kuhn is a partner in the Houston office of Jackson Walker LLP.

1 Vasquez v. Carmel Shopping Center, 777 S.W.2d 532 (Tex. App. – Corpus Christi 1989, writ denied).

2 Reynolds v. McCullough, 739 S.W.2d 42 (Tex. Civ. App. – San Antonio 1987, writ denied).

3 Pletz v. Standard Homes Company, 342 S.W.2d 621 (Tex. Civ. App. – San Antonio 1961, no writ).

4 Grossmann v. Barney, 359 S.W.2d 475 (Tex. Civ. App. – San Antonio 1962, writ ref'd. n.r.e.).

5 Mitchell's v. Nelms, 454 S.W.2d 809 (Tex. Civ. App. – Dallas 1970, writ ref'd. n.r.e.).

6 B.M.B. Corporation v. McMahan's Valley Stores, 869 F.2d 865 (5th Cir. 1989).

7 In re: S. R. Tjia and M. G. Soliman, 50 S.W.3d 614 (Tex. App. - Amarillo, 2001, rehearing overruled).

8 Nardis Sports Wear v. Simmons, 218 S.W.2d 451 (Tex. 1949).

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