Kendall v. Ernest Pestana, Inc.: Landlords May Not Unreasonably Withhold Consent to Commercial Lease Assignments

Pepperdine Law Review, Dec 1987

By Byron R. Lane, Published on 01/28/13

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Kendall v. Ernest Pestana, Inc.: Landlords May Not Unreasonably Withhold Consent to Commercial Lease Assignments

Kendall v. Ernest Pestana, Inc.: Landlords May Not Unreasonably Withhold Consent to Commercial Lease Assignments Byron R. Lane 0 1 0 Thi s Note is brought to you for free and open access by the School of Law at Pepperdine Digital Commons. It has been accepted for inclusion in Pepperdine Law Review by an authorized administrator of Pepperdine Digital Commons. For more information , please contact 1 Byron R. Lane Kendall v. Ernest Pestana, Inc.: Landlords - Article 4 1. 40 Cal. 3d 488, 709 P.2d 837, 220 Cal. Rptr. 818 (1985). 2. Kendall v. Ernest Pestana, Inc., 163 Cal. App. 3d 11, 209 Cal. Rptr. 135 (1984), vacated,40 Cal. 3d 488, 709 P.2d 837, 220 Cal. Rptr. 818 (1985). 3. See, e.g., Schweiso v. Williams, 150 Cal. App. 3d 883, 198 Cal. Rptr. 238 (1984); Cohen v. Ratinoff, 147 Cal. App. 3d 321, 195 Cal. Rptr. 84 (1983). Both Schweiso and Cohen were decided in favor of the lessee. See infra notes 30-36 and accompanying text. GENERAL BACKGROUND OF ASSIGNMENTS AND ALIENABILITY California conforms to the general principle that property of any kind is freely alienable;4 similarly, a leasehold interest is freely transferable.5 A lessee has an absolute right to assign6 or sublet7 the premises absent a contrary provision in the lease prohibiting or restricting such a transfer.8 Restrictions prohibiting assignments or subletting are valid exertions of a lessor's authority.9 Such constraints are justified as "reasonable protection of the interest of the lessor";o in addition, they give "to the lessor a needed control over the person entrusted with the lessor's property and to whom he must look for the performance of the covenants contained in the lease."11 Limitations on the freedom of alienation are "strictly construed and interpreted against the party for whose benefit they are created .... "12 "[C]ovenants limiting the free alienation of property.., are barely tolerated and must be strictly construed."13 Further, when forfeiture is foreseeable, restrictive clauses must be narrowly construed to limit restraints on alienation.14 repute and satisfactory to the lessors . ..,1.6 The court concluded that where the assignment is contingent upon the assignee being a person of "good character and repute and satisfactory to the lessors," lessors are "the sole judge[s] of . . . [their] own satisfaction, subject only to the limitations that [they] must act in good faith."17 It has been suggested that the Kendis opinion stands for the proposition that a lessor might be totally unreasonable in finding a prospective assignee unsatisfactory. Yet, if genuinely satisfied with the assignee, the [lessor] could not withhold his consent in order to obtain additional benefits for himself. Such an act hwiosurlidghatmtoouanstsitgonbtahde flaeiatshe.a1n8d would relieve the lessee of the restrictions on Permitting an unreasonable withholding of consent was reviewed and expanded upon in Richard v. Degen & Brody, Inc.19 In that case, the court held that "'where a subletting or assignment of the leased premises without the consent of the lessor is prohibited, he may withhold his assent arbitrarily and without regard to the qualifications of the proposed assignee ... ' ",20 While this is the majority rule, it has come under scrutiny in recent years for its harsh consequences. 21 In California, courts have consistently and liberally provided exceptions to the harsh consequences of the lessor having such an absolute power over the lessee.22 In Richardson v. La Rancherita La Jolla, Inc.,23 the court examined a corporation's transfer of shares as an attempt to circumvent the nonassignment covenant contained in the lease. While not explicitly requiring a lessor to act reasonably in withholding or giving consent, the court apparently assumed that consent may not be unreasonably denied. The court reasoned that the assignment "was only incidental to [the lessors'] predominant motive for terminating the existing lease to obtain a new lease upon more favorable terms .... [The lessors] restricted the negotiations to increasing their financial return and not to preserve their interest as lessor."24 The court further noted that the lessors had made no inquiry into the financial condition of the successor and presented no evidence that they believed their leasehold interest was threatened by the new owners. 25 An appellate court evaluating the assignment of an interest in a condominium complex2S concluded that the Homeowners Association, "in exercising its power to approve or disapprove transfers or assignments [1] . . . must act reasonably, exercising its power in a fair and nondiscriminatory manner . "..."T2h7e lease provision required the lessor's consent prior to any assignment or sublease and did not state consent would not be unreasonably withheld.28 However, the court stated that the association may "withhold approval only for a reason or reasons rationally related to the protection, preservation and proper operation of the property and the pu (...truncated)


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Byron R. Lane. Kendall v. Ernest Pestana, Inc.: Landlords May Not Unreasonably Withhold Consent to Commercial Lease Assignments, Pepperdine Law Review, 1987, Volume 14, Issue 1,