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Lease Shell Game
by Ron Davis
A shopping center tenant cannot avoid paying rent simply by assigning the lease to a subsidiary. So ruled Washington’s courts in a case involving a Bellevue shopping center that had to sue both a tenant and its subsidiary to collect back rent.
The tenant operated a retail clothing store at the shopping center under a 10-year lease. But two years before the lease expired, the tenant fell in arrears in paying rent and other tenant obligations it owed.
At about the same time, the tenant informed the shopping center’s owner that it intended to assign the lease to its sole subsidiary. Despite protests by the center’s owners, the tenant unilaterally assigned the lease and declared itself relieved of any lease requirements. (Neither the store name nor its merchandise was affected by the assignment, however.)
The shopping center’s owners pointed out that under the terms of the lease, any assignment is invalid while the tenant is in default. In response, the tenant argued that the assignment was indeed valid because it merely involved a company and its subsidiary.
A Washington court ruled in favor of the shopping center’s owners, concluding that the lease assignment between the tenant and its subsidiary was invalid and ordered payment of all back rent and other obligations. The tenant appealed, contending that because it “moved” from the premises, the subsidiary became the only legal lessee.
A Washington appellate court upheld the decision of the lower court, explaining, “Even though the assignment may have been valid between the tenant and its subsidiary, the shopping center’s owners constructively voided the assignment. In written correspondence, the owners reminded the tenant that it could not assign the lease while it was in default. The record contains no indication that the owners ever consented, explicitly or implicitly, to the assignment. Nor does the record indicate that the tenant cured the default so that it could assign its lease without the shopping center’s owners’ consent. In fact, it is unclear whether the owners even knew details of the lease assignment.... In any case, the owners voided the assignment, thus rendering it invalid.” (Bellevue Square Managers, Inc. V. GRS Clothing, Inc., 98 P.3d 498)
Decision: October 2004
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