VOLUME 264—NO. 30 WEDNESDAY, AUGUST 12, 2020
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R
eal estate practitioners are
frequently asked to opine on
whether particular corporate
transactions violate lease pro-
visions that are intended to
restrict assignments and changes in
control of the tenant. Typically, parties
are permitted to freely transfer contrac-
tual rights without obtaining permission
from their counterparties. However,
leases commonly contain provisions
restricting assignment, subletting and
changes in control. These restrictions
will be enforced, but will be construed
as restraints on alienation which are to
be narrowly construed.
Absent specic provisions restricting
stock transactions or mergers, courts
generally will not interpret common anti-
assignment provisions as prohibiting the
transfer of equity interests in either the
entity burdened by the provision or any
parent entities.
Similarly, restrictions on transfers
of interests in the tenant that do not
expressly cover a so-called “upper tier”
transfer of interests in parent or ances-
tor entities above the level of the tenant
are typically not read to restrict the
upper tier transfers. Where the trans-
action consists of equity transfers,
applicable anti-assignment covenants
like other restraints on alienation
will be construed strictly against the
restriction.
In a 2019 decision in Triple R Associ-
ates v. Checkers Drive-In Restaurants,
No. CV 17 888561 (Ohio Ct. of Claims
2019), a state trial court judge in Ohio
found that transfers involving a ten-
ant’s corporate great-grandparent and
great-great-great-grandparent violated
the applicable anti-assignment covenant.
While the judge did not explain in her
order why she believed that the trans-
actions at issue constituted prohibited
assignments under the lease, this deci-
sion raised questions about whether
there has been an evolution in the way
courts are interpreting and enforcing
anti-assignment provisions.
The clause being construed in Check-
ers restricted the transfer of any mem-
bership interest or effective control of
the Tenant. The clause included both
specic and broad catch-all terms that
the plaintiff landlord argued were clearly
and unambiguously meant to cover the
kinds of corporate transfers at issue in
the case.
Specically, the clause required land-
lord consent to the transfer by “sale,
assignment, bequest, inheritance, opera-
tion of law or other dispositions” that
result in “a change in the present effec-
tive control of Tenant.” The plaintiff
maintained that, regardless of how dis-
tant the relevant transactions appeared
on an organizational chart of the tenant,
the effective control of tenant was direct-
ly implicated by the transfers because
the transactions led to an overhaul of
the tenant’s entire ownership structure
and board.
On the basis of the facts so presented,
the court determined that “reasonable
minds can come but to one conclusion”
and entered judgment for the plaintiff
on this claim. The judgment was never
appealed—the parties ultimately settled
the lawsuit after mediation.
While the result reached by the
court raised some questions, Check-
ers may not really be inconsistent with
traditional approaches to interpreting
anti-assignment provisions. The court
may have concluded that, even if the
clause at issue were strictly construed,
its broad language (“effective control”)
ALLEN M. WIEDER is a counsel and SALVATORE
GOGLIORMELLA is a partner at Paul, Weiss, Rifkind,
Wharton & Garrison LLP. Partner PETER E. FISCH and
summer associates CHAD HUGHES and YIHAN
ZHUANG assisted in the preparation of this article.
TRANSACTIONAL REAL ESTATE
Anti-Assignment
Provisions in Leases
By
Allen M.
Wieder
And
Salvatore
Gogliormella
In some jurisdictions, this reprint may be considered attorney advertising. Past representations are no guarantee of future outcomes.
While the result reached by the
court raised some questions,
‘Checkers’ may not really be
inconsistent with traditional
approaches to interpreting anti-
assignment provisions.
WEDNESDAY, AUGUST 12, 2020
explicitly covered the particular transac-
tions that occurred (which did in fact
result in changes to the tenant’s board)
and that judgment for the plaintiff was
therefore warranted.
Indeed, a review we conducted of
the case law in a sampling of states
(New York, California, Texas and Illi-
nois) shows that each state continues
to take a variation of the approach
described above, narrowly inter-
preting anti-assignment provisions.
New York
While the Court of Appeals has not
directly decided this issue, the Appellate
Division, trial courts, and the Southern
District of New York (applying New York
law) have consistently taken a strict
approach to construing anti-assignment
provisions.
In Brentsun Realty Corp. v. D’Urso
Supermarkets, Inc., 182 A.D.2d 604, 582
N.Y.S.2d 216 (N.Y. App. Div. 1992), the
Second Department interpreted an anti-
assignment covenant in a lease that pro-
hibited the assignment of the lease or
the disposition or sale of 50 percent or
more of the stock of the tenant without
written consent.
The court found that the merger of
the subsidiary tenant into its parent
did not violate the covenant because
“[t]he merger did not change the ben-
ecial ownership, possession, or con-
trol of [tenant’s] property or leasehold
estate. Only [tenant’s] corporate form
was affected, not the corporate prop-
erty. Therefore no assignment or similar
transfer of the lease occurred.”
In Cellular Tel. v. 210 East 86th Street
Corp., 44 A.D.3d 77, 839 N.Y.S.2d 476
(N.Y. App. Div. 2007), the First Depart-
ment interpreted a clause that prohib-
ited the transfer or other disposition
of more than 25 percent of the issued
and outstanding capital stock of the
tenant. The court found that the acqui-
sition of the tenant’s parent company
did not constitute an assignment for
purposes of the clause. “Given the
vast web of interlocking ownership
between many corporations, it would
be unreasonable to read the lease pro-
vision as effecting an assignment or
transfer whenever some far removed
corporate parent is sold, especially
when the lease expressly limits the
prohibition to capital stock of tenant.”
The Cellular Tel. court did, however,
find that a separate anti-assignment
provision was triggered by two merg-
ers—the parent entity’s merger with the
subsidiary tenant, which resulted in the
parent becoming the tenant, and the
tenant’s follow-on merger with another
entity, which was determined to effect
an assignment under the lease.
California
California courts have similarly strict-
ly interpreted lease assignment restric-
tions involving a corporate tenant.
A landlord that has knowledge of a
tenant’s corporate identity but does not
specically restrict stock transfers in the
lease cannot claim that the corporate
tenant’s stock transaction breached the
anti-assignment clause.
In Ser-Bye Corp. v. C.P. & G. Markets,
Inc., 78 Cal. App.2d 915, 179 P.2d 342
(Cal. App. 1947), a corporate tenant
held a lease that contained a restriction
against assignment of the lease without
landlord’s consent. The shares of the
tenant corporation were sold and the
landlord sued. After acknowledging the
equitable rule against forfeitures, the
court ruled that the anti-assignment
clause was not violated because that
clause prohibited only a transfer of the
leasehold interest and not a transfer of
the ownership of the corporation. In the
absence of language in the lease showing
“the clear and manifest intention of the
parties” to treat the transfer of stock
as an assignment, the anti-assignment
clause was not violated.
The court in Richardson v. La Ran-
cherita of La Jolla, 98 Cal. App. 3d 73, 159
Cal Rptr. 285 (Cal. App. 1979), similarly
held that a lease to a corporate tenant
restricting assignment, either voluntarily
or by operation of law, was not violated
by the sale of the corporation’s stock.
The court of appeals reasoned that there
was no violation in the absence of lan-
guage reecting an intent to prohibit
a change in stock ownership without
landlord’s consent.
The California courts do not yet seem
to have decided any lease assignment
restriction cases where changes in con-
trol are prohibited but a transfer was
made through an indirect or upper-tier
entity.
Illinois
Illinois also strictly interprets anti-
assignment provisions. Under Illinois
law, the general rule is that absent spe-
cial circumstances, a “change in corpo-
rate ownership does not effectuate an
assignment of rights.” Ineos Polymers
Inc. v. BASF Catalysts, 553 F.3d 491, 499
(7
th
Cir. 2009).
In Transamerica Commercial Finance
Corp. v. Stockholder Systems, Inc., 1990
U.S. Dist. LEXIS 15275, 1990 WL 186088
(N.D. Il. 1990), a U.S. district court found
that a licensee had not violated an anti-
assignment provision after a series
of mergers and upper-tier transfers.
While plaintiffs argued that the transac-
tions violated the transfer restriction,
the court held that the anti-assign-
ment provision was not implicated
because the agreement “does not
prohibit even the licensee (much
less the parent … which owns all of
the stock of the licensee) from selling
its stock”.
In Tyco Lab., Inc. v. Dasi Indus., Inc.,
1993 U.S. Dist. LEXIS 12654, 1993 WL
356929 (N.D. Ill. 1993), the court held
that while a change in control may in
certain circumstances violate an anti-
assignment provision, a change in con-
trol of an upper-tier holding company
would not: “The License Agreement
provided that a change in controlling
ownership of a party to the contract
would be considered an assignment, not
that a change in controlling ownership
of the owner of the party would be so
considered.”
WEDNESDAY, AUGUST 12, 2020
However, the court in another case,
Pioneer Trust & Sav. Bank v. Zayre Corp.,
1989 U.S. Dist. LEXIS 10832, 1989 WL
106669 (N.D. Ill. 1989), showed a will-
ingness to collapse multiple steps in a
transaction in order to give effect to an
anti-assignment clause. The court found
that a tenant violated an anti-assignment
clause in transferring its lease to a sub-
sidiary and then selling that subsidiary
to another company.
The clause in question clearly grant-
ed the tenant the right to transfer its
lease to a subsidiary, but prohibited
the lease from being assigned to unre-
lated entities. The court found that
once the subsidiary was sold to a third
party, the original tenant no longer had
an interest in the lease in violation of
the restriction. The court expressly
distinguished language in Section
7:3.3[C][1] of Friedman on Leases
stating that a two-step process, like
that utilized by Zayre, could be used to
circumvent an anti-assignment provi-
sion and concluded that the specic
language of the lease required a dif-
ferent result.
Texas
Texas courts have recognized the
strong policy against forfeiture in the
lease context, and have held generally
that the sale or transfer of the stock of
a corporation does not constitute an
assignment, in the absence of express
change of control restrictions. Texas
courts appear to follow the general
approach of strictly construing anti-
assignment restrictions.
In Tenneco, Inc. v. Enterprise Produc-
tions Co., 925 S.W.2d 640, 39 Tex. Sup.
J. 907 (Tex.1996), the Supreme Court of
Texas narrowly construed assignment
restrictions in the context of a prefer-
ential right to purchase. The original
owners of a plant had an agreement that
provided the owners with a right of rst
refusal if “any Owner should desire to
sell, transfer or assign” its ownership
interest.
The defendant purchased all the
equity in one of the owners, and the
other owners sued to exercise their
right of rst refusal. In granting sum-
mary judgment to the defendant, the
Court distinguished a sale of equity from
a sale or assignment of assets and noted
that the right of rst refusal would have
been triggered had the parties includ-
ed a change-of-control provision in the
agreement.
In TXO Prod. Co. v. M.D. Mark, Inc.,
999 S.W.2d 137, 1999 Tex. App. LEXIS
5581 (Tex. App. 1999), the court cited
other jurisdictions’ disfavor towards
forfeiture in leases, expressed a simi-
lar unwillingness to nd that a merger
breaches a non-assignment clause,
and held that a parent-subsidiary
merger did not violate an agreement
which provided that certain data “shall
not be sold, traded, disposed of, or
otherwise made available to third
parties.”
The court cited favorably to Dodier
Realty & Inv. Co. v. St. Louis National
Baseball Club, Inc., 361 Mo. 981, 238
S.W.2d 321 (Mo. 1951), where the merger
of a contractual party into its controlling
shareholder was held to not violate the
anti-assignment clause in a lease. The
court also cited to cases where courts in
other jurisdictions were unwilling to nd
that a merger violated anti-assignment
provisions in circumstances including
insurance policies, trackage rights, con-
struction contracts, printing contracts,
arbitration clauses, non-compete cov-
enants, and employee compensation
contracts.
Finally, the court noted that the par-
ties could have easily specified that
the non-disclosure provision was impli-
cated by a statutory merger, and the
court refused to imply a violation in the
absence of that agreement.
As in California, courts in Texas do
not yet seem to have decided whether
a lease restriction on changes in control
of a tenant would be violated by the
transfer of an upper-tier entity.
Conclusion
These cases suggest that courts in
New York, California, Texas, and Illinois
intend to continue to carefully consider
and narrowly construe anti-assignment
provisions in leases and other corporate
transactional documents. The Checkers
case may have turned on the “effective
control” formulation and the fact that
the transfer in question resulted in sig-
nicant changes to board composition.
A lease without this formulation or
a transaction without such changes
could yield a different result. In addi-
tion, not all jurisdictions have deter-
mined how to treat upper-tier trans-
fers when not expressly restricted,
and individual judges may arrive at
seemingly inconsistent conclusions
based upon the facts before them.
Clarity in negotiating these provi-
sions is paramount in order to leave
as little as possible for the courts
to interpret in the event of a later
conict.
Reprinted with permission from the August 12, 2020 edition of the NEW YORK
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