A.D. Juilliard & Co. v. American Woolen Co.
32 A.2d 800 (1943)
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Rule of Law:
An assignee of a real property lease who has not expressly assumed the lease's obligations is liable to the lessor for rent only while in possession of the property (privity of estate), and this liability terminates upon a subsequent, non-fraudulent assignment of the lease to another party.
Facts:
- On May 12, 1893, Atlantic Mills leased property to Riverside Worsted Mills for a term ending September 1, 1955. The lease contained no restrictions on assignment or a requirement that assignees assume the lease's covenants.
- Over many years, the lease was assigned multiple times. On February 15, 1916, the American Woolen Company (defendant) became the assignee.
- None of the assignments included an express agreement by the assignee to assume the obligation to pay rent for the entire unexpired term of the lease.
- On December 4, 1936, the plaintiff succeeded to the rights of the original lessor, Atlantic Mills.
- The defendant assigned the lease to its subsidiary, Textile Realty Company, on June 1, 1939.
- On November 21, 1939, Textile Realty Company assigned the lease to Reo Realty Company, a corporation in which the defendant held no interest and over which it exercised no control.
- Rent and taxes went unpaid for the period of September 1940 to March 1941, after Reo Realty Company had taken possession of the premises.
Procedural Posture:
- The plaintiff, a successor to the original lessor, filed an action in assumpsit in the superior court against the American Woolen Company (defendant) to recover unpaid rent and taxes.
- The trial justice of the superior court, sitting without a jury, found in favor of the defendant.
- The plaintiff appealed the trial court's decision to the state's highest court.
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Issue:
Is an assignee of a real property lease, who has not expressly assumed the obligations of the lease, liable for rent for the entire unexpired term after making a subsequent, non-colorable assignment of the lease?
Opinions:
Majority - Capotosto, J.
No. The assignee of a lease who has not expressly assumed its obligations is liable for rent only while there is privity of estate, which terminates upon a valid subsequent assignment. The court adopted the overwhelming majority rule that an assignee's liability for rent is based on privity of estate, not privity of contract, unless the assignee expressly assumes the lease covenants. This liability lasts only as long as the assignee holds the estate. Once the assignee makes a valid, subsequent assignment and relinquishes possession and control, the privity of estate with the lessor is broken, and liability for future rent ceases. The court rejected the plaintiff's arguments that the defendant had 'indirectly' assumed the lease through its course of dealings, finding no evidence of such an agreement. Furthermore, the court found the final assignment to Reo Realty Company was not 'colorable' or a sham, but a bona fide transaction where the defendant and its subsidiary relinquished all possession, control, and benefits of the leasehold, thereby terminating their liability.
Analysis:
This decision solidifies the critical distinction between liability founded on privity of contract versus privity of estate in the context of lease assignments. It affirms the majority American rule that an assignee, absent an express assumption, can sever future liability by reassigning the lease, provided the reassignment is not a sham. This precedent emphasizes the importance of contractual drafting for lessors; if a lessor wants to hold all subsequent assignees liable for the entire lease term, they must include an express assumption clause in the original lease or require it upon assignment. The ruling provides clarity and predictability for commercial real estate transactions by defining the default limits of an assignee's liability.
