Equitable Assumption of a Commercial Lease:
Tips for Commercial Property Owners
If a subtenant who has not signed a sublease fails
to pay rent, the landlord may be able to enforce the original lease terms
against the subtenant.
Most commercial landlords know that, when
a tenant subleases or assigns to a third party, the best practice is to have the
subtenant or assignee execute a written sublease and/or an assignment/assumption
agreement before allowing the subtenant or assignee to use the property.
Nonetheless, that "detail" has slipped
through the cracks for too many commercial property owners who are often
grateful just to be receiving rent checks. Landlords should be aware that if
these "undocumented" subtenants and/or assignees fail to pay rent in a timely
manner and in accordance with the terms of the original lease, the landlord may
be able to enforce the original lease terms (including, of course, the rent
provisions) against those occupying their property.
The Arizona Court of Appeals' ruling
Independent Gin Co. v. Parker states that "where a person, other than
the lessee, is shown to be in possession of leased premises and paying rent
therefor, the law presumes that the lease has been assigned to him." In Independent Gin, the landlord leased farming land to a tenant pursuant to a
written lease agreement. The lease agreement was then amended. According to the
amended lease, the lease term was from January 30, 1964, through December 31,
1969. In 1965, the original tenant abandoned the premises and the defendant (in
that case) moved onto the premises and began farming the land. The defendant
paid all of the rent, with the exception of the final payment. The Court of
Appeals upheld the trial court’s decision to hold the defendant liable for the
remaining lease term and stated that the defendant, "being in possession and
paying rent, was therefore presumptively an assignee of the leasehold term."
Other courts have supported Arizona’s
position that, when the new tenant occupies the premises and pays rent in
accordance with the lease terms, the legal effect is a presumption of a lease
assignment – even without a written agreement assigning obligations under an
existing lease to a new tenant.
For example, the Georgia Court of Appeals addressed
this issue in
Liberty Loan Corp. of Lakewood v. Leftwich, stating:
…where premises are under lease, and someone other than the
lessee or his recognized assignee occupies the premises in the guise of or as if
he were a subtenant, without the express consent of the landlord, and pays the
rent stipulated in the lease directly to the landlord, the landlord has the
exclusive prerogative to elect to treat the occupant then in possession as his
tenant under the lease, thus binding both himself and the occupant to the
conditions of the lease for the unexpired term.
Commercial property owners should always
document the transition of new tenants with a new lease or an assignment and/or
assumption agreement. If, however, this step was missed and their property is
occupied by a subtenant or assignee who is not subject to a written lease, the
commercial owner should review the situation with an experienced real estate
attorney, to be apprised of their rights and potential ability to enforce the
terms of the original lease.