Gazlay v. Williams

Background

This case involves landlords (the lessors), a tenant named Harry D. Brown who became bankrupt, and Williams, the trustee in bankruptcy. The lease said it would be forfeited if the tenant assigned the lease or if the tenant’s interest was sold under execution or other legal process without the landlord’s written consent. After Brown’s adjudication in bankruptcy, his leasehold interest passed by operation of law to the trustee, who sold the interest to satisfy creditors. The lower courts and the parties disputed whether that trustee sale violated the lease’s forfeiture clause.

Reasoning

The Court addressed whether a sale by a bankruptcy trustee is the tenant’s voluntary assignment that triggers forfeiture. Relying on the rule that transfers that occur by operation of law are not voluntary assignments, the Court explained that the trustee’s sale is of the trustee’s interest for the benefit of creditors and not an act by the bankrupt. The Court cited prior authorities showing a covenant must expressly forbid transfers by operation of law to cause forfeiture. Applying those principles, the Court concluded the trustee’s sale did not breach the covenant and affirmed the decree.

Real world impact

The decision means landlords generally cannot claim an automatic forfeiture when a tenant becomes bankrupt and a trustee sells the leasehold to satisfy creditors, unless the lease clearly and expressly bars transfers by operation of law. Creditors and trustees can sell lease interests to raise funds without causing automatic loss of the lease under these facts.