Summary of Kendall v. Ernest Pestana, Inc., Supreme Ct. of CA (1985)
Parties: PL – Kendall – potential assignees; want to buy a business and be assigned DF’s property
DF Ernest – refused to consent to the assignment, stated they arbitrarily had a right to refuse and over all seems to want more money in order to approve the assignment. They are the assignee of a lessee of the city.
Cause of action/remedy sought: PL seeks equitable remedies of declaratory and injunctive relief, plus legal damages for DF’s unreasonable and unlawful restraint on the freedom of alienation.
Procedural History: Trial court sustained DF’s demurrer w/o leave to amend. This court finds there is a cause of action to try.
Facts: City of San Jose assigns 14,400 sq. feet at the airport to Perlicht. They enter into a 25 year lease with Bixler on 1-1-70, who builds up a business until he decides to sell to PL/appellant Kendall et al. in 1981.
Sometime between 1970 and 1981, Perlichts assign their interest to DF/appellee. The lease required written consent of the lessor before the lessee could assign his interest, and failure to do so would render the lease voidable at the option of the lessor.
Bixler and PL/appellant sought this consent from Perlichts successor in interest, appellee, who arbitrarily refused because appellee was seeking increased rent and other more onerous terms. PL/appellant brought this suit.
Issue(s): Under CA property law, can the lessor arbitrarily refuse a proposed assignment, no matter how appropriate the assignment or unreasonable the lessor is being, when a lease contains such an approval clause?
Holding: No. Policies against restraints on alienation and the implied contractual duty of good faith and fair dealing show that there is no commercially reasonable objection to the assignee or the proposed use.
Court’s Rationale/Reasoning: The law favors free alienability, and in California, leasehold interests are freely alienable. Contractual restrictions on alienability of leaseholds are permitted, because the lessor has a reversionary interest, and can derive income from it, and should be allowed to protect these interests.
Majority of jurisdictions hold that where a lease contains an approval clause, the lessor may arbitrarily refuse to approve a proposed assignee. Minority, but growing view is that consent may be withheld only where the lessor has a commercially reasonable objection to the assignment, even absent provisions that the assignment will not be unreasonably withheld. Minority view adopted because:
1 – Based on conveyance of a lease – Unreasonable restraints on alienation can be caused by the arbitrary withholding of consent, and modern society requires reasonable alienation of commercial space.
2 – Based on contract of the lease, good faith and fair dealing should be inherent in any contract. When a contract gives one party a discretionary power over the other party, a duty is imposed to exercise the discretion in good faith.
Such a clause is to protect the landowner in his ownership and operation of the property, not for economic protection. It is not reasonable to deny consent in order to charge higher rent.
Rejects the four policy arguments of the majority rule:
1 – Lessor having exercised a personal choice need look no further than his lessee, the one he chose for his own land. This is undermined already by the duty to mitigate damages and find another T for a T who abandoned. There are also numerous reasonable reasons to withhold consent, and the original lessee is also still the guarantor of the assignee.
2 – Lessee could have bargained for a reasonableness clause, if they didn’t, tough, it shouldn’t be rewritten by the court. The language though is not clear and unambiguous, and it can be inferred the parties intended reasonableness, just as likely as if they didn’t.
3 – Stare decisis – however, the majority viewpoint is far from universal, and times change.
4 – the lessor, not the lessee, is entitled to any benefit from increased property values. This would give the lessor more than he bargained for. Lessors can build rent increases into a lease. Lessee takes a risk he could be paying too much for the property, if chose wisely and got value, he should be able to enjoy it. Besides, lessor will get the increased value when the lease expires.
Possible Effects: Greater clarity in the drafting of provisions within a lease.
Rule: Minority rule: where a commercial lease provides for assignment only with the acceptance of the prior lessor, such consent may be withheld only where the lessor has a commercially reasonable objection to the assignee or the proposed use
Did court avoid issues?: The rule for residential assignments.
Dissents: 2 judges said lessor may have relied on the common law rule at the time he made the lease and legislature, not the court, should overturn the common law.