In 1990, Sears-Roebuck signed a 10-year lease in a shopping center for use as a HomeLife furniture store. The lease contained two additional five-year renewal options. HomeLife was a wholly owned Sears subsidiary.

In 1998, Sears sold its HomeLife division, retaining a 19 percent ownership interest. Sears sought the consent of the shopping center landlord, JGMCJ, to assign the lease to HomeLife. JGMCJ agreed to the lease assignment with the understanding Sears remained liable for any unpaid rent.

Purchase Bob Bruss reports online.

In 2000, JGMCJ and HomeLife extended the lease for 10 years under the two extension options. The rent was increased at that time.

The lease extension said, “This extension shall in no way be considered a waiver of landlord’s rights against Sears Roebuck and Co. under the lease.” However, Sears did not sign the extension agreement.

In 2001, HomeLife filed for bankruptcy and stopped paying rent on Nov. 23, 2001. In 2003, landlord JGMCJ filed this lawsuit against Sears, alleging Sears is liable for the unpaid rent.

But Sears replied it has no further rent liability under the lease extension because the lease stated Sears had no rent obligation beyond the original term because of the rent increase after the original term. However, JGMCJ argued that when it agreed to the lease assignment to HomeLife, Sears was to remain liable as a surety for rent payment.

If you were the judge would you hold Sears liable for the unpaid rent for the lease extension period?

The judge said no!

Sears was liable for the rent under the original 10-year lease and after the lease was assigned to HomeLife, the judge began. “Under common law principles, upon assignment of a lease, the original lessee becomes a surety for the performance of the covenants of the lease by the assignee,” he continued.

“However, just as a surety is discharged by material changes in a contract, an original lessee can be discharged by material changes in the lease negotiated between the assignee and the lessor,” the judge emphasized.

The material changes after the original 10-year lease expired, including the rent increase for HomeLife, were never consented to by Sears, he noted. Therefore, Sears is not liable for any of the unpaid rent under the lease extension agreement, the judge ruled.

Based on the U.S. Court of Appeals decision in JGMCJ Corp. v. Sears, Roebuck & Co., 391 Fed.3d 364.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

***

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