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
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1 Byron R. Lane Kendall v. Ernest Pestana, Inc.: Landlords
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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)