When May a Landlord Withhold Consent to Assign a Commercial Lease under Tennessee Law?

It is pretty typical for commercial leases in Tennessee, and in other states, to allow a tenant (otherwise known as a “lessee”) to assign its rights and obligations under a commercial lease. It is also pretty typical that such provisions provide that the landlord (otherwise known as the “lessor”) cannot “unreasonably” withhold consent to such an assignment.

An instructive case on what Tennessee courts would consider to be unreasonably withholding consent to an assignment of a lease by a landlord is 1963 Jackson, Inc. v. De Vos (Tenn. Ct. App. 2013). Here are the basic facts:

  • In 1967, a commercial lease (“Lease”) was entered into between the parties’ predecessors
  • The commercial lease was a “ground lease” pursuant to which the Lessee was obligated to construct and maintain a hotel
  • In 2005, the Lessor became a trust benefitting descendants of the original owner
  • A Mr. De Vos was the trustee of that trust and acted as the Lessor
  • By 2009, through a series of events, the Lessee became a company named “1963 Jackson”
  • 1963 Jackson requested that De Vos allow it to assign the Lease to a company called the “Morgan Group”
  • 1963 Jackson notified De Vos of its intent to assign the Lease to the Morgan Group and requested that he let it know what he needed in order to consider approving such an assignment
  • De Vos requested financial information of the shareholders of the Morgan Group
  • The two shareholders had net worth’s of $27 million dollars and $800,000, respectively, as established by financial statements provided to De Vos
  • One of the shareholders had $1.3 million in liquid net assets
  • That information was not enough for De Vos and he requested that the two shareholders of the Morgan Group agree to guarantee, personally, the obligations of the Lessee under the Lease
  • He also asked for information about the shareholders’ experience in hotel management
  • The shareholders agreed to provide personal guarantees for the Lease and supplied De Vos with an extensive outline of their experience in the hotel industry
  • De Vos refused to consent to the assignment (and, in fact, terminated the Lease based on what he considered to be breaches)

The trial court determined that De Vos had unreasonably withheld his consent to the assignment and found in favor of the tenant, 1963 Jackson. That decision was affirmed by the Court of Appeals of Tennessee.

The court started its analysis by observing that, under Tennessee commercial lease law, the “primary factor” in determining whether a landlord has unreasonably withheld consent to an assignment is the “financial responsibility” of the proposed assignee.

On appeal, De Vos argued that his concerns about the financial ability of the Morgan Group to meet the obligations of the Lease were justified because the Morgan Group was just a shell holding company with no assets and no prior experience with hotel management. The Court of Appeals made short work of this argument.  It pointed out that, at trial, 1963 Jackson had presented testimony from an expert in the hotel industry that it was a common practice for a hotel lease to be owned by a new entity with no assets and that the personal guarantees which the shareholders of the Morgan Group were willing to provide made De Vos’s concerns unreasonable.

De Vos also argued that it was not unreasonable for him to withhold consent because the Lease terms provided that the Lessor would be paid a specified dollar amount, or a percentage of revenues from the hotel, if the percentage of revenues was greater. De Vos argued that it was reasonable for him to expect that, after the proposed assignment, the Lessor would not receive the greater amount, and therefore, it was reasonable for him to withhold consent.  Again, the Court of Appeals made quick work of De Vos’s argument.  It found this argument without merit because, for many years before the proposed assignment, the hotel had not generated enough revenue to entitle the Lessor to the greater rent amount based on net revenues.

De Vos also argued that the Morgan Group’s refusal to agree to spend more for upgrades of the hotel than was required by the terms of Lease made his decision reasonable. The Court of Appeals had the obvious reply to this argument: De Vos was not entitled to try to exact concessions not required by the original Lease terms and then claim that his decision was reasonable because they were not met.

There was one other big factor in the case. The proof at trial showed that De Vos himself had a buyer for the real estate on the hook, but the buyer would only buy if it could also assume the Lease. Thus, De Vos had a motive for trying to scuttle any assignment.

For Tennessee commercial lease lawyers, the above case proves that Tennessee courts will not allow landlords to put forth flimsy excuses to deny assignments of commercial leases.

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