Limitation on Damages for Unreasonable Withholding of Consent

Limitation on Damages for Unreasonable Withholding of Consent

Occasionally, I will see the following provision in a landlord form lease:

If Landlord or Tenant unreasonably fails to give consent as provided under this Lease, the other party shall be entitled to specific performance in equity and shall have such other remedies as are reserved to it under this Lease, but in no event shall Landlord or Tenant be responsible in monetary damages for failure to give consent unless such consent is withheld maliciously or in bad faith.

In other words, if the landlord unreasonably withholds its consent, the tenant can sue for specific performance to obtain the landlord’s consent but cannot obtain any monetary damages caused by the unreasonable withholding of consent.

The most critical instances that require landlord consent are: (1) consent to an assignment or sublease, and (2) consent to alterations to the premises.  Consider the following example: a tenant desires to assign its lease for some reason (needs bigger space, going out of business, etc.).  The tenant markets the premises for sublease and obtains a “good” subtenant with an adequate net worth and a flawless rental history.  The subtenant intends to use the premises as a call center, which is permitted under the lease.  The tenant submits the subtenant for the landlord’s consent.  For some reason, the landlord withholds its consent.  The landlord may cite an ambiguous reason, such as the tenant does not fit the character of the project.  However, it is obvious that the landlord simply does not want a call center in the project.  The withholding of consent could be a costly decision, depending on the remaining value of the lease (if the remainder of the lease is 6 years at $15,000 per month, the value of the lease is over $1,000,000).

The landlord’s withholding of consent may or may not be reasonable.  However, if the tenant cannot seek monetary damages, the tenant has no real remedy.  Pursuit of specific performance will take several months in court.  It is unlikely that any prospective subtenant will remain interested in the premises pending the outcome of litigation.  The court may rule that the landlord must consent to a subtenant that is no longer interested in the premises.

Even though the provision appears neutral, it heavily favors the landlord because most critical consents come from the landlord.  A tenant should carefully review its lease prior to signing to ensure this type of limitation on damages for unreasonable withholding of consent is deleted.

Prior to using any language or concepts from this blog entry, consult with an attorney.

Ryan Rosensteel is a real estate and construction attorney licensed in Arizona.  You can contact him at rrosensteel@rrlawaz.com.