718 Associates, Ltd. v. Sunwest N.O.P., Inc.

Court of Appeals of Texas
1 S.W.3d 355 (1999)

ELI5:

Rule of Law:

An option to extend a lease is a covenant running with the land that is transferred to an assignee upon a valid assignment of the lease, unless the lease contains clear, express language making the option personal to the original lessee.

Facts:

On October 21, 1976, Robert F. Gossett, Jr. and Safeway Stores, Inc. ('Safeway/Maryland') executed a 20-year commercial lease which included an option for the lessee to extend the lease for seven additional five-year periods.
The lease contained a clause stating, 'Lessee shall have the right to assign or transfer this lease'.
On November 30, 1976, Gossett assigned his interest as lessor to 718 Associates, Ltd.
On November 1, 1986, Safeway/Maryland assigned its entire leasehold interest to Safeway Stores 83, Inc. ('Safeway 83').
The leasehold interest was subsequently assigned from Safeway 83 to Property Development Associates ('PDA') on November 30, 1987.
On May 16, 1988, PDA assigned its entire interest in the lease, including all options, to SunWest N.O.P., Inc.
On December 31, 1994, SunWest notified 718 Associates of its intent to exercise all seven five-year extension options.
718 Associates rejected SunWest's notice, contending that the option to extend was a right personal to the original lessee, Safeway/Maryland, and was not transferable.

Procedural Posture:

On June 27, 1996, SunWest filed a declaratory judgment action against 718 Associates in a Texas state trial court.
Both parties filed motions for summary judgment, which the trial court initially denied in January 1997.
SunWest filed a Motion for Reconsideration.
On April 14, 1998, the trial court granted SunWest's motion for summary judgment and denied 718 Associates' motion.
718 Associates, as appellant, appealed the trial court's judgment to the Court of Appeals of Texas, Tenth District, Waco.

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Issue:

Does a general right to assign a commercial lease transfer the lessee's option to extend the lease term to a subsequent assignee, making it an enforceable covenant running with the land rather than a personal right of the original lessee?

Opinions:

Majority - Justice Bill Vance

Yes. A general right to assign a lease transfers all covenants that run with the land, including an option to extend the lease term, to the assignee unless the lease contains clear language making the option personal to the original lessee. The court reasoned that the transfers were true assignments, not subleases, because the assignors conveyed their entire interests without retaining any reversionary rights; the clause keeping the original lessee liable merely restates the law of privity of contract and does not create a reversion. The court also held that the lease's express language granting the 'right to assign' was sufficient to override the Texas statutory requirement for landlord consent. Crucially, the court determined that an option to extend a lease is a covenant that 'touches and concerns the land' and is therefore presumed to run with the land. In the absence of specific language in the lease restricting this right or making it personal to Safeway/Maryland, the option was transferred to each successive assignee, vesting SunWest with the right to exercise it.

Analysis:

This case clarifies that a general 'right to assign' clause in a commercial lease is powerful, potentially waiving statutory consent requirements and transferring valuable rights like extension options. It reinforces the legal presumption that lease options are covenants running with the land, not personal rights, which provides certainty for assignees acquiring leasehold interests. The decision serves as a critical reminder for lessors to draft leases with explicit, unambiguous language if they wish to restrict the transfer of specific rights and make them personal to the original tenant. The ruling solidifies the distinction between an assignment, which transfers the entire estate, and a sublease, protecting the expectations of commercial tenants and assignees.

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