Tennessee Courts Will Enforce Anti-Assignment Provisions in Leases

Commercial and residential leases frequently have an anti-assignment provision, which is a provision that prohibits the tenant from assigning or transferring the tenancy to a third party. A property owner should have final say, the reasoning goes, as to who can possess the owner’s property, and the tenant shouldn’t be able to transfer those rights to a stranger without the landlord’s consent. (Except in Bankruptcy Court.)

A new opinion posted by the Tennessee Court of Appeals emphasizes how strongly courts in Tennessee will enforce these provisions.

In Simmons Bank v. Vastland Development Partnership, No. M2018-00347-COA-R3-CV (June 27, 2019), the tenant assign the lease to a stranger or a literal third party; instead, the original tenant (First State Bank) merged into and was acquired by Simmons Bank. “Simmons Bank was the surviving entity, and First State Bank no longer existed separately. See Tenn. Code Ann. § 48-21-108(a)(1).”

A few months after the merger, Simmons Bank attempted to exercise its option to renew the Lease, and the landlord objected, saying that lease expressly states that any renewal requires that “Tenant is the Tenant originally named herein.” Here, Simmons Bank was not the tenant “originally named herein.” First State Bank was named in the Lease.

The Chancery Court agreed with Simmons Bank, but the Court of Appeals reversed, citing  the maxim that contracts are interpreted strictly according to their terms.  As a result, reading the text in its clear and strict meaning, the appellate court wrote: “the parties agreed to restrict the right to renew the Lease to one entity, First State Bank, ‘the Tenant originally named’ in the Lease. As a consequence, Simmons Bank does not have the right to exercise the renewal option.”

This is an interesting case because, as Simmons Bank argued, a merger of two entities really doesn’t introduce a new “stranger” into the tenancy, but, instead, pursuant to pursuant to Tenn. Code Ann. § 48-21-108(a)(2), a merger transfers all rights of the merged entity into the new one.

My guess is that the business, the employees, the phone numbers–most everything except the sign out front–remained the same. My concern is that the focus on the “name” of the entity creates an opportunity for a landlord to create a “technical” default.

To throw out an absurd example, what if a woman gets married and takes her husband’s name? Would she no longer be the “Tenant originally named herein”?

Under this new opinion, she wouldn’t.

Nevertheless, they don’t ask me to write the judicial opinions. But, they do pay me to help clients draft and negotiate lease provisions. An easy fix to a situation like this would be a provision that allowed for a new named tenant in the event of a merger or sale of all tenant’s assets.

 

Author: David

I am a creditors rights attorney with Bone McAllester Norton PLLC in Nashville, Tennessee.

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