Opinion ID: 504431
Heading Depth: 1
Heading Rank: 2

Heading: Sublease or Assignment?

Text: 10 It is undisputed that Ohio law governs. In Ohio, leases are contracts and principles of contract law govern, including those regarding interpretation and construction. W.F.I., Inc. v. Heberts Business Furniture Co., 12 Ohio Misc.2d 1, 465 N.E.2d 1360 (Cleveland Mun.Ct.1983); Glyco v. Schultz, 35 Ohio Misc. 25, 29, 289 N.E.2d 919, 923 (Sylvania Mun.Ct.1972). The Ohio Supreme Court has held that [c]ommon words appearing in a written instrument will be given their ordinary meaning unless manifest absurdity results, or unless some other meaning is clearly evidenced from the face or overall contents of the instrument. Alexander v. Buckeye Pipe Line Co., 53 Ohio St.2d 241, 374 N.E.2d 146 (1978) (paragraph two of syllabus). Furthermore, where the terms in an existing contract are clear and unambiguous, this court cannot in effect create a new contract by finding an intent not expressed in the clear language employed by the parties. Alexander, 53 Ohio St.2d at 246, 374 N.E.2d at 150 (citing paragraph one of syllabus in Blosser v. Enderlin, 113 Ohio St. 121, 148 N.E. 393 (1925)). 11 Under Ohio law, and common law generally, an assignment of a leasehold is a transaction in which a lessee transfers its entire interest in the leased premises for the unexpired term of the lease. Cross v. Commercial Real Estate, 16 Ohio N.P. (n.s.) 97 (Cuyahoga Cty. C.P. 1914). See Restatement (Second) of Property Sec. 15.1, comment i (1977). If the lessee transfers less than his entire estate or the balance of the term, it is a sublease. Jones v. Smith, 14 Ohio 606 (1846). See Restatement (Second) of Property Sec. 15.1, comment i (1977). 12 Joseph Brothers argues that the agreement between Woolworth and SCOA is an assignment because, at the time of its execution, Woolworth's lease with Joseph Brothers expired on January 31, 1990, and the agreement with SCOA expired on January 30, 1995. Therefore, Joseph Brothers argues, Woolworth conveyed all its interest (and more) in the lease, thus creating an assignment. Because Woolworth assigned the lease to an entity other than a wholly owned subsidiary without the consent of Joseph Brothers, it is contended that Woolworth breached the lease and the lease is terminated. 13 Woolworth argues, and the district court agreed, that Woolworth reserved the reversionary interest of one day, thus creating a sublease. 4 As the district court noted, the reservation of even one day of the term creates a sublease. See Worthington v. Ballauf, 6 Ohio Dec.Rep. 1121, 1121 (Cincinnati Super.Ct.1882) (If a day of the term, or a particle of the estate be reserved, the transaction is not an assignment but a subletting.). The problem, however, as asserted by Joseph Brothers and recognized by the district court, arose because Woolworth did not exercise its option to extend its lease with Joseph Brothers from January 31, 1990, to January 31, 1995, until after Woolworth had entered into the agreement with SCOA, which would expire on January 30, 1995. The Ohio Supreme Court has held that: 14 A lease of real property for a specified number of years coupled with an option to extend or renew the same for an additional period gives the lease effect as an original present demise for the full term for which it might be made inclusive, contingent on the election to extend or renew. 15 Corvington v. Heppert, 156 Ohio St. 411, 103 N.E.2d 558 (1952) (syllabus paragraph two). In Cross v. Commercial Real Estate, 16 Ohio N.P. (n.s.) 97, 97 (Cuyahoga Cty.C.P.1914), the court held that: 16 Where a lease for a term of years contains an option of purchase on the last day of the term and also a clause of non-assignment without written consent of the lessor, a new lease made by the lessee for a term extending beyond that of the original lease will not be treated as a ground of forfeiture for assignment without written consent but rather as a sublease, where it appears that the lessee acted with the intention in good faith of obtaining the fee on the last day of the term, and of treating the new lease as a sub-lease and not as an assignment, and a proper tender of purchase was in fact made at the stipulated time, and the conditions of the new lease as to rental reserved, building conditions, insurance and right of re-entry are different from those in the original lease. 17 The district court held that the term of the original Joseph Brothers lease to Woolworth was deemed to be enlarged to encompass Woolworth's initial option period, even though the sublease was entered into before the option in the lease was exercised, because Woolworth clearly acted with the intention in good faith of exercising its option to extend the term of the lease until January 31, 1995. Joseph Bros., 641 F.Supp. at 825. The letter from Woolworth exercising its option to extend the lease was sent within a month of its agreement with SCOA, and over five years before it was necessary to exercise the option to extend the lease. Therefore, the district court concluded that reasonable minds had to agree that Woolworth intended to sublease the premises to SCOA, and, when entering into the sublease, intended to exercise its option to extend the lease with Joseph Brothers. 641 F.Supp. at 825. See F.W. Woolworth Co. v. Plaza North, Inc., 493 N.E.2d 1304 (Ind.Ct.App.1986) (sublease expiring one day before extension of overlease is valid sublease); In re Lafayette Radio Elecs. Corp., 9 B.R. 993 (Bkrtcy. E.D.N.Y.1981) (valid sublease created even though terms exceeded lease term because tenant/sublessor had vested option to extend lease beyond sublease term). 18 Joseph Brothers argues that Woolworth did not act in good faith because Woolworth was negotiating with SCOA at the same time Joseph Brothers also was in contact with SCOA, did not inform Joseph Brothers of this, and deprived Joseph Brothers of the opportunity to lease directly to SCOA. Given that Joseph Brothers did not exercise its option to cancel the lease when the Woolco store closed, Joseph Brothers cannot now complain that Woolworth found a way to make a profit out of the situation in which Joseph Brothers placed Woolworth. Moreover, Woolworth complied with all provisions of the lease regarding the extension and so, as the district court held, acted in good faith. Accordingly, we affirm the holding of the district court that the agreement between Woolworth and SCOA constituted a sublease.