Bankrupt Tenant's Assignee Can Exercise Extension Option

August 31, 2003

A tenant's lease gave it an extension option but said that this option was the tenant's “personal right” and couldn't be exercised by its “successors or assigns.” After the tenant filed for bankruptcy, the bankruptcy court assigned the lease. The assignee tried to exercise the extension option. But the owner said it had no right to do so and sued the assignee, asking the court to order the assignee to leave the space, since the original lease term had ended.

A tenant's lease gave it an extension option but said that this option was the tenant's “personal right” and couldn't be exercised by its “successors or assigns.” After the tenant filed for bankruptcy, the bankruptcy court assigned the lease. The assignee tried to exercise the extension option. But the owner said it had no right to do so and sued the assignee, asking the court to order the assignee to leave the space, since the original lease term had ended.

A federal appeals court in Virginia dismissed the lawsuit, ruling that the assignee could exercise the extension option. The court said that the bankruptcy code invalidates any lease clause designed to hurt a tenant's ability to assign its lease by imposing an “economic impediment” to an assignment. The court said that the clause in question would impose such an impediment because without the extension option, the lease would be less attractive to potential buyers of the tenant's assets—that is, the assignee would be stuck with a two-year lease, rather than the 12-year lease it thought it was going to get [Double K Properties, LLC v. Aaron Rent, Inc.].

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