When is consent unreasonably withheld?

Consent provisions in contracts and leases become hot issues in the context of an acquisition. Landlords and licensors don't always have to play nice and a badly drafted consent provision in a key contract could kill an entire deal.

In negotiating these provisions, lawyers often try to soften the impact by requiring that the consenting party (such as a landlord, bank, licensor, etc.) does not "unreasonably withhold consent". What does this clause really mean?

A couple of recent decisions help interpret what protection this clause may actually provide to the party seeking consent in the future. They also provide guidance as to the type of information that a consenting party may reasonably request in order to evaluate whether or not to grant its consent.

A recent Massachusetts Supreme Judicial Court decision, Chapman v. Katz, 448 Mass. 519, 862 N.E.2d 735 (Mass. Mar 16, 2007) restates the law in Massachusetts on when it is reasonable to withhold consent in the context of a commercial lease.

• In a commercial context, only factors which relate to a landlord's interest in preserving the property or in having the terms of the prime lease performed should be considered. Among the factors properly considered are the financial responsibility of the subtenant, the legality and suitability of the proposed use, and the nature of the occupancy. A landlord's personal taste and convenience, on the other hand, are not factors properly considered. . . .
• [I]t is unreasonable for a landlord to withhold consent to a sublease solely to extract an economic concession or to improve its economic position.

Another decision comes out of California from the auto franchise context . Fladeboe v. American Isuzu Motors Inc., 2007 WL 1191135 (Cal.App. 4 Dist. Apr 23, 2007). Here the court provided as follows:

• [W]ithholding consent to assignment of an automobile franchise is reasonable under California Vehicle Code section 11713.3(e) if it is supported by substantial evidence showing that the proposed assignee is materially deficient with respect to one or more appropriate, performance-related criteria. This test is more exacting than whether the manufacturer subjectively made the decision in good faith after considering appropriate criteria. It is an objective test that requires that the decision be supported by evidence. The test is less exacting than one which requires that the manufacturer demonstrate by a preponderance of the evidence that the proposed assignee is deficient.
• The relevant criteria include, without limitation: (1) whether the proposed dealer has adequate working capital; (2) the extent of prior experience of the proposed dealer; (3) whether the proposed dealer has been profitable in the past; (4) the location of the proposed dealer; (5) the prior sales performance of the proposed dealer; (6) the business acumen of the proposed dealer; (7) the suitability of combining the franchise in question with other franchises at the same location; (8) whether the proposed dealer provides the manufacturer sufficient information regarding its qualifications; and (9) the dealer's honesty and good faith in relations with the manufacturer.
• The initial burden of explaining the basis for the decision is on the manufacturer, but the ultimate burden of persuasion is on the assigning dealer to demonstrate that the manufacturer's refusal to consent is unreasonable.”