American Community Stores Corp. v. Newman
441 N.W.2d 154 (1989), 232 Neb. 434 (1989)
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Rule of Law:
A transfer of a leasehold interest is a sublease rather than an assignment if the original lessee retains a reversionary interest, which can be established by either transferring the interest for a period shorter than the primary lease term—even by one day—or by retaining a right of reentry for condition broken.
Facts:
- American Community Stores Corporation (ACS) was the tenant on three long-term grocery store leases which prohibited assignment without the landlord's written consent but expressly permitted subletting.
- The leases contained a clause giving ACS a 20-day period to cure any default after receiving written notice from the landlord.
- Facing business difficulties, ACS decided to transfer its interests in the stores to Nash-Finch Company, initially preparing and signing documents structured as assignments.
- ACS sought the landlords' consent for the assignments, but the landlords refused and, on February 8, 1985, sent letters to ACS giving formal notice of default for violating the non-assignment clause.
- In mid-February, within the 20-day cure period, ACS and Nash-Finch agreed to replace the assignment agreements with new agreements structured as subleases.
- The new sublease agreements provided that the term of the sublease would end two days prior to the expiration of ACS's term under the original prime lease.
Procedural Posture:
- Plaintiffs (tenants, ACS) filed petitions for declaratory judgment in the district court against defendants (landlords' trustees).
- Defendants filed a counterclaim seeking possession of the premises.
- Both parties filed cross-motions for summary judgment in the trial court.
- The trial court granted summary judgment for the plaintiffs, holding that the agreements were subleases and did not violate the prime lease, and dismissed the defendants' counterclaims.
- Defendants (appellants) appealed the trial court's judgment to the Nebraska Supreme Court.
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Issue:
Does a lessee's transfer of its interest in a leased property constitute a permissible sublease, rather than a prohibited assignment, when the agreement is structured to expire two days before the primary lease and the lessee retains a right of reentry, thereby curing a prior default within the contractual grace period?
Opinions:
Majority - Hastings, C.J.
Yes. The transfer constitutes a permissible sublease because the lessee retained a reversionary interest, thereby curing the default within the time allowed by the lease. The critical distinction between an assignment and a sublease is whether the original tenant transfers its entire interest for the full remaining term or retains a reversionary interest. Here, ACS retained a reversionary interest in two ways: first, by structuring the subleases to expire two days before the expiration of the prime leases, and second, by retaining a right of reentry for condition broken. The court formally adopts the rule that either of these is sufficient to classify the transfer as a sublease. While the initial attempt to assign the lease without consent was a violation, it was rendered ineffective by the landlord's refusal to consent and was validly cured within the 20-day contractual period when ACS replaced the assignment with a legally distinct and permissible sublease.
Analysis:
This case solidifies the formalistic, common-law distinction between an assignment and a sublease in Nebraska. It provides tenants with a clear and easily implemented method to circumvent non-assignment clauses so long as subletting is permitted. By holding that retaining even a de minimis reversionary interest (such as one or two days) is sufficient to create a sublease, the court prioritizes the technical form of the agreement over the practical substance of the transfer. This decision weakens a landlord's control over the occupancy of their property in situations where the lease allows for subletting, as it blesses a transfer for nearly the entire remaining term of a lease.
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