Owner's and Assignee's Agreement Freed Tenant from Lease Obligations

February 1, 2005

A tenant assigned its 10-year lease, with the owner's consent. At the end of the lease, the owner asked the tenant if it wanted to exercise a five-year extension option. The tenant didn't respond. The owner then signed an extension agreement with the assignee that changed several lease terms—including the rent amount. The tenant never signed the extension agreement. When the assignee filed for bankruptcy and stopped paying rent, the owner sued the tenant, claiming that the tenant had to pay the rent.

A tenant assigned its 10-year lease, with the owner's consent. At the end of the lease, the owner asked the tenant if it wanted to exercise a five-year extension option. The tenant didn't respond. The owner then signed an extension agreement with the assignee that changed several lease terms—including the rent amount. The tenant never signed the extension agreement. When the assignee filed for bankruptcy and stopped paying rent, the owner sued the tenant, claiming that the tenant had to pay the rent.

A federal appeals court dismissed the lawsuit because the tenant had been released from its lease obligations. The lease's assignment clause said that the tenant wouldn't be responsible for rent payments beyond the “term” the tenant had agreed to in writing. Because the tenant hadn't agreed to any lease extension, that meant the tenant wasn't responsible for rent beyond the original 10-year lease, said the court. Also, the court noted that when an owner and assignee agree to “material—that is, important—changes to a lease, the law releases the original tenant from its lease obligations. Here, the extension agreement materially changed the terms of the original lease [JGMCJ Corp. v. Sears, Roebuck & Co.].

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