Relying on Lease Terms to Invalidate Oral Consent to Sublet

Q A medical clinic tenant in my strip mall renewed its lease only because I orally agreed that it could continue to sublet a portion of its space to a blood lab that serves the clinic's patients. Now, I have a lucrative offer from a franchised blood lab that's a competitor of the clinic's lab. But the franchised lab won't rent the large space it's interested in from me as long as the clinic's lab is operating.

The clinic's lease requires it to get my written permission to assign or sublet its space. Because it was given orally, not in writing, is my consent to the sublet invalid, allowing me to evict the clinic and the lab?

A No. An owner is bound by its oral consent to a sublet under certain circumstances—such as yours. Even if your lease with the clinic specifies that your consent to a sublet must be in writing, your actions have changed that requirement—and you can't rely on the lease provision to support a change in your position.

That was the situation in a case similar to yours, where an Indiana building owner tried to evict a doctor's office after it began sharing its space with a lab that provided blood testing and radiology services for its patients. The sole reason that the doctor's office had decided to renew its lease was that the owner promised that it could use the lab to provide those additional services. The doctor's office specifically mentioned this during renegotiations, where the owner responded that he “had no problem with additional services at the site.”

However, a provision of the lease stated that notice would need to be given to the owner, followed by its written permission, before any assignment or sublet would be permitted. It stated: “Tenant agrees that neither this Lease nor any rights under this Lease may be assigned, nor may any portion of the Leased Premises be sublet, without the prior written consent of Landlord, which consent will not be unreasonably withheld. Any transfer of this Lease from Tenant by merger, consolidation, liquidation, or otherwise by operation of law will constitute an assignment for the purpose of this Lease and will require the written consent of Landlord. Tenant will not permit any business to be operated in or from the premises by any concessionaire or licensee without the prior written consent of Landlord.”

In December 2008, the doctor's office entered into a Technical Services Agreement (TSA) with a lab to provide the necessary on-site services for the convenience of its patients. The TSA stated that the lab would be provided with a work area, use of the restroom and common areas in the building, and access to and from the leased premises during regular business hours.

But the owner reconsidered its oral consent to the sublet after the TSA had been executed because it had begun negotiations with a different lab for it to lease one of the other units adjacent to the doctor's office's space. The other lab would not agree to a lease if the doctor's office's lab was on the property. The owner then asserted that the sublet violated the terms of the lease and tried to evict the doctor's office and lab. A trial court denied the owner's request to evict the doctor's office, and the owner appealed.

For two reasons, the appeals court determined that the doctor's office hadn't breached its lease by maintaining another business on the premises and subletting to it without the owner's written permission.

Lab Not “Business” Barred by Sublease Provisions

The relationship between the doctor's office and the lab did not violate the lease provisions because the lab simply was providing a service; that service did not constitute a “business” under the lease. There was no other evidence demonstrating that the doctor's office was subletting the premises. Moreover, the lab neither advertised nor operated as a public business. And its representatives had no keys to the building.

The appeals court noted that an original lessee—here, the doctor's office—remains liable to the owner for the payment of rent under a sublease. In this case, the TSA specifically states that the lab provides services to the doctor's office's patients as an “independent contractor.” And the agreement makes it clear that the lab has no right to possess any particular portion of the leased premises.

In light of these circumstances, the doctor's office did not sublet the premises to the lab in violation of the lease agreement, said the appeals court. The TSA did not amount to a sublease. Rather, the doctor's office retained the lab solely as an independent contractor to perform laboratory work on the premises. Therefore, the owner's claim on that basis was invalid.

Inducement Makes Oral Consent Valid

But even assuming that the TSA amounted to a sublease, there was evidence that the owner had agreed to the TSA. During the lease negotiations, the owner voiced no objection to that proposition when the doctor's office clearly told the owner that it would not renew its lease if it could not have lab services on the property. And the owner admitted to the trial court that he had initially given his oral permission to allow the lab on the premises.

In order to induce the doctor's office to sign a 10-year lease that it would not have entered into otherwise, the owner agreed to permit lab services at the leased premises. And the tenant relied on that consent to enter into the TSA. Although the owner later changed its mind about the sublet—presumably because of the negotiations with the other lab—it could not rescind its consent by relying on the written consent requirement in the lease.

The appeals court pointed out that “a landlord may waive strict compliance with the terms of a lease by its own behavior…It is well settled that where one party has by his representations or conduct induced the other party to a transaction to give him an advantage, which it would be against equity and good conscience for him to assert, he will not in a court of justice be permitted to avail himself of that advantage.” Accordingly, the owner could not avail itself of the advantage that was gained by its own representations to the doctor's office [East Valparaiso, LLC v. Physicians for Women, P.C., et al., October 2010].