Assignment Does Not Eliminate Options

Facts: An owner and tenant entered into a 20-year lease that included four lease extension options, each for five years. The owner assigned his interest in the lease to a new owner—that is, gave the new owner all of its rights in the lease. The tenant assigned the 20-year base lease to a new tenant, and assigned the lease options to a third party. Several years later, the third party assigned the lease options to the new tenant. At the end of the original 20-year lease term, the new tenant and the new owner failed to successfully negotiate a lease extension, at which time the new tenant asserted that it had four lease extension options. The new owner insisted that the lease options no longer existed after the assignment of the original lease. The tenant then sued the owner, asking the court to declare the options valid.

Decision: A North Carolina appeals court ruled for the tenant.

Reasoning: The court stated that without explicit language in the lease assignment eliminating the lease options, the options could still be exercised or assigned. The new owner argued that by assigning the original lease and not the options, the original tenant caused the cancellation of the options. The owner also argued that negotiating a new lease with the tenant proved that the tenant also believed the options were invalid.

The court found that the terms of the assignment clearly stated that only the original lease term was assigned and that the original tenant kept the options until they were later assigned to the new tenant. The court noted that this assignment was actually a sublease because the original tenant retained an interest in the property. The court found that the assignment of the options was valid and that the new tenant could exercise the options if it wished.

• Kmart Corp. and Kroger LP I v. Guastello, May 2008