Whenever a tenant assigns its rights under a lease to another tenant, it befits the landlord that the assignee tenant executes an express assumption of the lease. A recent case, BRE DDR BR Whittwood CA LLC v. Farmers & Merchants Bank of Long Beach (“BRE”), serves as an example. In BRE the former tenant/lender (the “Second Tenant” or “Lender”) prevailed over the landlord because the Second Tenant failed to execute an express assumption of the lease. The Lender became the Second Tenant after foreclosing on a construction deed of trust against the trustor/first tenant (the “First Tenant”). Because the Lender had no interest in the lease it subsequently assigned it to a third-party tenant (the “Third Tenant”). Everything fell apart when the Third Tenant stopped paying rent and returned possession of the premises before the end of the lease. Seeking to recover its damages, the landlord brought action against the Second Tenant.
General Law on Assumption of Leases
Two types of privities arise under a lease. One is privity of contract, and the other is privity of estate. (Vallely Investments v. BancAmerica Commercial Corp. (2001) 88 Cal.App.4th 816, 822.) These distinctions are important in determining the liabilities of a succeeding assignee/tenant.
An assignee who takes possession of the premises without executing an assumption contract is bound by all lease covenants which run with the land under privity of estate. However, upon assigning the lease, the former assignee tenant, now the assignor tenant, is relieved of all its obligations because privity of estate no longer exists. (Kelly v. Tri-Cities Broadcasting, Inc. (1983) 147 Cal.App.3d 666, 678 (“Tri Cities”).) The result is entirely different when a tenant assumes the obligations of the lease pursuant to an express agreement.
The assumption agreement creates a new privity of contract between landlord and assignee, enforceable by the landlord as a third-party beneficiary, regardless of whether the landlord was a party to the assumption agreement. As a consequence, the assuming assignee is required to perform all covenants of the lease for the remainder of its term, absent a release by the landlord. (Hartman Ranch Co. v. Associated Oil Co. (1937) 10 Cal.2d 232, 244–245; Rest.2d Property, Landlord and Tenant, § 16.1 (4), com. c, p. 121; BRE DDR BR Whittwood CA LLC v. Farmers & Merchants Bank of Long Beach (2017) 14 Cal.App.5th 992, 1000.)
For privity of contract to apply courts require an “express assumption” of the contractual obligations of the lease. (Enterprise Leasing Corp. v. Shugart Corp. (1991) 231 Cal.App.3d 737, 746.) Only then will the law hold an assignee liable for the lease obligations. (Id.)
To establish an express assumption, the lease must contain language that the assignee/tenant specifically agrees to bind itself to the lease obligations. (BRE DDR BR Whittwood CA LLC v. Farmers & Merchants Bank of Long Beach (2017) 14 Cal.App.5th 992, 1001.) In In Bank of America National Trust & Savings Association v. Moore, the court found the defendant assumed the obligations of a lease by stating so in a written assignment agreement. The document was signed by the defendant, as assignee, and the assignor. The document concluded, “ ‘It being understood that said Assignee … is to accept, assume and agree to perform all of the terms, conditions and limitations contained in said lease.’ [¶] ‘The undersigned, [defendant], hereby accepts, assumes and agrees to perform all of the terms, conditions and limitations contained in the aforementioned lease to be kept and performed by said lessee.’ ” (BRE DDR BR Whittwood CA LLC v. Farmers & Merchants Bank of Long Beach (2017) 14 Cal.App.5th 992, 1001.)
Why the Lease Terms Were Insufficient to Obligate the Lender
The Court’s reference to the lease in Tri Cities best explains why it failed to find that the Lender was obligated to the terms of the lease under privity of contract. There, a lease between the landowner and tenant required any assignee to assume the lease obligations: “Lessee hereby warrants and represents that in the event said assignment shall ever take place, the assignee therein shall assume all of the liabilities and obligations assumed by Lessee in this Lease Agreement.” (BRE DDR BR Whittwood CA LLC v. Farmers & Merchants Bank of Long Beach (2017) 14 Cal.App.5th 992, 1002.) The lease further provided that the “ ‘assigns and/or heirs of both parties shall carry out the terms of this Lease Agreement.’ ” (Id.)
Thereafter the defendant purchased the lessee’s business, including the lease. The purchase agreement acknowledged the lease and attached an exhibit that stated, “ ‘Land Lease covering real property on which broadcasting transmitter is located.’ ” (Id.) In ruling in favor for the landlord, the trial court agreed with the Landlord that this language was sufficient evidence that the assignee expressly assumed the obligations of the lease. The appellate court disagreed.
The appellate court noted that “[i]n every case examined where there has been an express assumption, the assignee has stated specifically either orally or in writing that he agrees to be bound by the terms of the lease.” (Id. at 1003.) Thus, the appellate court concluded that “as a matter of law no evidence was presented to the trial court … to substantiate the conclusion Tri-Cities had assumed the lease.” (Id.)
A Guide to Drafting Your Lease
First the BRE court noted that the Landlord should have required the Lender to execute a document requiring it to assume the lease obligations. (Id. at 1003.) However, if this proves to cumbersome, the court also noted that landlords could include language in the original lease requiring consent and assumption. (Id. at 1004.) For examples see Bennett v. Leatherby (1992) 3 Cal.App.4th 449, 452 ([“lessor[ ] consented to the sublease and required ‘the specific assumption of all of the obligations’ ”]; Bank of America National Trust & Savings Association v. Moore (1937) 18 Cal.App.2d 522, 525 (“the lease itself declares that an assignment shall be void unless the assignee agrees, in writing, to carry its burdens, the agreement of the defendant, in harmony with the requirement of the lease, may be interpreted as a contract directly with the lessor”].)
By Randy Aguirre, esq.