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Aldrich Nine Associates v. Foot Locker Speciality, Inc.

2005 WL 3005715 (N.J. Super. App. Div. 2005) (Unpublished)

LEASES; ASSIGNMENTS—The general rule is that, absent some exception, an assignor remains liable for the tenant’s obligation under the lease with the assignee being the primary obligor and the assignor acting as a guarantor.

A landlord entered into a written lease agreement with a sports company for a portion of its property. The lease granted the sports company a five year renewal option. During the term of the lease, the sports company assigned its interest in the lease to a realty company. After the assignment, the realty company exercised the renewal option and extended the term of the lease for another five years. Shortly thereafter, the landlord and the realty company executed a lease amendment agreement. Four months later, the realty company filed for bankruptcy, vacated the leased premises, and stopped paying rent. The landlord then sued the sports company for the unpaid rent which had accrued during the renewal period. The lower court granted summary judgment in the landlord’s favor, finding that despite the assignment, the sports company’s liability under the lease continued during the renewal period when the unpaid rent accrued. The sports company appealed, arguing that the lower court erred by granting summary judgment because genuine issues of material fact were present.

The Appellate Division affirmed the lower court’s ruling, finding that the sports company was still liable under the lease. In reaching its decision, it discussed the rule regarding lease assignments. In general, an assignment of a lease does not discharge an assignor from its contractual obligations. Instead, when a lease is assigned, the assignee becomes the principal obligor for the payment of rent and the performance of the lease covenants, while the assignor becomes a guarantor for the assignee. As a result, if the assignee fails to perform any of its lease obligations, the assignor is required to perform the obligations. The are two exceptions to this rule. The first is if the assignee enters into a direct lease agreement with the landlord which establishes a new tenancy relationship and terminates the old relationship that the landlord had with the assignor. Under these circumstances, the assignor is no longer liable under the lease. The second exception is if the landlord and assignee enter into an agreement that materially alters the terms of the lease. An example of a material alteration is one that substantially increases the risk of loss to the assignor or places the assignor in a different position. Under these circumstances, an assignor would no longer be liable under the lease, unless the material alteration actually benefitted the assignor. In this case, the Court found that the modifications made to the lease by the lease amendment between the landlord and the sports company’s assignee did not materially alter the lease. Instead, the lease was modified to, among other things, establish a new termination date and increase the number of renewal options. The Court found that the sports company was correctly held liable for unpaid rent that accrued during the renewal period because the renewal period had been granted under the original lease agreement that the sports company executed before it was modified by the amendment.

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