Equitable Assumption of a Commercial Lease: Tips for Commercial Property Owners

July 14, 2014 Bryan J. Gottfredson Real Estate Law

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.

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. 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.

The Arizona Court of Appeals’ ruling in 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, therefore, 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.