Property Class Notes 4/6/04

This case says that there is no implied covenant of quiet enjoyment in New Jersey. But New Jersey is the only state where this is true, as far as Braunstein knows. But what is the implied convent and quiet enjoyment? What if someone busts into your property and drinks your beer and watches your TV? That’s a trespass. But if the landlord or someone acting for the landlord does the same thing, that would be a breach of the implied covenant of quiet enjoyment. Basically, this covenant says that your possession will not be disturbed by the landlord, someone acting on behalf of the landlord, or someone with superior title to the landlord.

Does the landlord have to give you possession at the beginning of the term? Yes, they do. The American Rule says that the landlord must only give the legal right to possession, but it’s the tenant’s job to get the other person out. The English Rule says that the landlord has to clear out the premises before the tenant moves in. The tenant must be put in both legal and actual, exclusive possession of the property. The burden of doing a lawsuit goes to the landlord. So which rule is better? The English Rule may make more sense because the landlord is the least cost avoider. The landlord can make it right more cheaply than the tenant. The landlord is likely more sophisticated and is more likely a repeat litigator. Also, the court says that when you rent space, you’re paying for space rather than the right to sue for it. So why would the American Rule be the majority rule? If you conceive of a lease as the sale of an interest in property, and it’s not the landlord who is causing the problem, then once you’ve bought the property, it’s your problem. If we think of the tenant as the owner of a property interest, then we may find that the landlord no longer has an interest. This keeps with early conceptions of the lease.

Whichever rule is adopted, it’s only a default rule that the parties can contract around. Even in a state that follows the American Rule, the lease could provide that the tenant will get actual as well as legal possession at the start of the lease. But the problem is that most tenants wouldn’t think to include the language of the English Rule in the lease. Once you say the American Rule is the default rule and that the parties can bargain for whatever they want, the problem is that the tenant may assume that they’re getting a guarantee of actual possession and they won’t think to bargain for it.

Don’t look at an old case like this and assume that the state of the law is the same now as it was then.

Slater v. Pearle Vision Center, Inc.

Why did Pearle care? If they’re paying the rent, why didn’t they just occupy the premises? If they did move in, they would have operating expenses. The shopping mall doesn’t want to look “suckier”. If you have empty stores, suckyness is manifest.

The court starts out as construing this agreement as mainly a contract rather than a conveyance. But what difference does that make? If we interpret this as a sale, we have a one-time transaction between the parties and the tenant has a property right. That would be the end of it. We would figure out the duties of the parties based on that relationship. But if we construe it as a contract, we get into a whole different set of guidelines for construing contracts, including the implied obligation of good faith. The court will interpret the contract to protect the reasonable expectations of the parties. The modern view of the lease is that it is predominantly a contract and not a conveyance of property interest. Most courts would look at this as an ongoing relationship that is much the same as a contract. This case is consistent with the modern trend of how leases are construed.

The court gets into the doctrine of necessary implication, which is that expectation that the parties must do those things that are just in order for the bargain to be carried out. Then the court delves into some of the specific lease provisions that seem to suggest that both parties contemplated that occupying the property was part of the deal. On the other hand, the lease doesn’t say that the store must remain open on certain days or for certain hours. These provisions give some support to the court’s argument, Braunstein says. The main point is that courts treat leases as contracts and then adopt doctrines of good faith and fair dealing into the contract. This represents a fairly modern view of the lease and how it ought to be construed.

Assignment and subleases

What’s an assignment? What’s a sublease? And what is the difference?

You have an assignment when the tenant transfers his entire interest in the lease and the leased premises to an assignee. The consequence is that the tenant remains liable. The tenant is always liable to the landlord because there is still a contract between the landlord and the tenant. The landlord and tenant are in privity of contract. The tenant has obligated himself to pay the rent and keep up the premises as provided for in the lease, and the tenant will have to do that no matter what, unless there is a novation, where the landlord says that he’ll take the new tenant and let the old one off the hook. In addition, the landlord and tenant are in privity of estate. We talked about this in connection with adverse possession. It’s hard to define, and in fact it might not mean much at all. But privity of estate occurs when landlord and tenant both own interest in the same property at the same time. Another way to put it is that it’s a relationship that exists among parties so that it is reasonable to conclude that they owe obligations to each other. This is a very fuzzy definition, because: just what is that reasonable relationship? Let us say for the time being that landlord and tenant are in privity of estate because they own the same land at the same time.

When there is assignment, and the tenant gives up all his rights to the assignee, then privity of estate no longer exists between the landlord and tenant, but rather between the landlord and the new tenant (the assignee). The original tenant now has nothing! The new privity of estate is sufficient to enforce the provisions of the lease against the assignee. The landlord has two theories of enforcement: privity of contract and privity of estate. Privity of contract will always exist between the landlord and the original tenant. Privity of estate will be between the landlord and the assignee after assignment.

Davis v. Vidal

What’s the difference between an assignment and a sublease? The technical difference is that when a tenant subleases the property, the tenant retains an interest (a reversion). The easiest way to conceive of that is if the tenant has a three year lease and subleases the property to someone for two years. The tenant has a reversion at the end of the sublease because the tenant hasn’t leased for the entire term. When the tenant subleases the property, the tenant retains a reversionary interest. The tenant is, as always, in privity of contract with the landlord, but also remains in privity of estate with the landlord because the tenant continues to hold the estate. The sublessee is neither in privity of estate nor privity of contract with the landlord. The landlord’s only remedies will be against the tenant, not against the sublessee!

Sometimes the courts apply these rules in a mechanical way. Sometimes they’ll look and see if there’s a reversion. If there is, it’s a sublease, and if there isn’t, there’s an assignment. Other courts will consider the intent of the parties. But the problem with the latter approach is that the courts can’t figure out the intent of the parties because the parties didn’t really know what they were doing!

In this case, the instrument states that it’s a “transfer”, “assignment” and “sublease”! In general, in order to enforce a contract you must be in privity of contract. If you promise someone that you’ll do something for them and you don’t do it, I can’t sue. Only the person who has been harmed can sue. But there is an exception: two people can enter into an assumption agreement for the benefit of a third party. The tenant and a sublessee can enter into an assumption agreement under which the sublessee agrees to perform all of the duties required under the lease. Then privity of contract is created between the landlord and the sublessee under the third-party beneficiary assumption agreement. The point is that the property law concepts of assignment and sublease, plus the contract concept of third-party beneficiary agreements.

Some problems

The landlord leases to the tenant for a three year term. The tenant subleases for the remainder of the term, reserving the right to re-enter. Neither the tenant nor the sublessee pays any rent. What rights does the landlord have, and against whom? This looks like a sublease to me rather than an assignment. In that case, the landlord can only recover against the tenant but not the sublessee. There is still privity of contract between the landlord and the original tenant. The landlord has a contract with the tenant to pay every month! It doesn’t matter what other agreements the tenant has made! But can the landlord recover against the sublessee? There is no assumption agreement in this case. Is there privity of estate between the landlord and the sublessee? This is essentially the same case as Davis v. Vidal. The tenant still has a reversionary interest. Should the sublessee fail to pay the rent, the tenant can exercise his right of entry. In Davis v. Vidal, the court holds that the existence of that right of entry is enough of a reversionary interest that we can say that the tenant has not transferred the entire estate. Thus, the tenant is still in privity of estate with the landlord, and the sublessee is not in privity of anything with the landlord.

Does this opinion make sense? Is reservation of the right of entry to make something not an assignment? If the sublessee doesn’t pay the rent, what could the tenant do? The tenant could pay the rent himself. He could also evict the sublessee using a Forcible Entry and Detainer statute! This isn’t exactly the same, but it is similar to the right of entry. Given that the tenant has this power anyway, many courts would say that such a right of entry is not sufficient to prevent this from being an assignment because this is substantially similar to what the law would allow anyway. That would put the landlord and the sublessee in privity of contract. The reservation of the right of entry seems to be the main factor that the court relied upon. In order to proceed again an assumption agreement, the tenant and the sublessee must enter into such an agreement. That’s not what we had here.

An assignment is a transfer of the entire interest. A sublease is a transfer of less than the entire interest. If the entire interest is transferred, the landlord can sue the tenant based on privity of contract, and sue the sublesse based on privity of estate. The result of the case won’t really be based on what the parties call the transaction, but rather on the intent of the parties as judged by the court.

Another problem: The landlord does a three year lease with the tenant. The tenant transfers the lease to somebody else for the balance of the term. The new tenant pays rent to the landlord for a while, but then the new tenant defaults. The landlord sues the original tenant for the rent past due. Will the original tenant be liable? Let’s say that the new tenant agreed to pay the rent directly to the landlord. So the new tenant has breached his promise to the landlord. There is another theory here besides contract. It’s subrogation! When the tenant pays a debt that is primarily due from someone else, the tenant is subrogating the rights of the landlord, and the tenant can enforce any of the rights that the landlord could have enforced. The landlord could have sued the subtenant, so the tenant could do the same. The subtenant is the one in possession. The subtenant doesn’t. The tenant can step into the landlord’s shoes and sue the subtenant.

Back to Class Notes