Kendall v. Ernest Pestana, Inc

Brief Fact Summary. A commercial lease required the lessee to obtain written consent from the lessor before assigning any interest in the property to a third party.

Synopsis of Rule of Law. In a commercial lease, a landlord can withhold his consent to assignment by the tenant only if the landlord has a commercially reasonable objection to the assignment.

Facts. The City of San Jose owned a hangar at an airport, and leased it to Irving and Janice Perlitch. The Perlitchs assigned their interest to Ernest Pestana, Inc. (Defendant). Prior to assigning their interest to Defendant, the Perlitchs entered into a sublease with Robert Bixler, who started a business on the property. The sublease stated that before the lessee could assign his interest, he had to obtain written consent from the lessor, otherwise the lease could be voidable at the option of the lessor. Bixler wanted to sell his business to Jack Kendall (Plaintiff) and requested consent from Ernest Pestana, Inc., who refused to give it, claiming it had the right to arbitrarily refuse such a request. Plaintiff seeks declaratory and injunctive relief and damages.

Issue. May a lessor unreasonably and arbitrarily withhold his consent to an assignment?

Held. No.
The law generally favors the free alienability of property. A leasehold interest is freely alienable, though contractual restrictions on the alienability of leasehold interests are permitted.
When a lease allows assignment only with the prior consent of the lessor, the consent may only be withheld where the lessor has a commercially reasonable objection to the assignment, even in the absence of a provision in the lease stating that consent to assignment will not be unreasonably withheld.
The lessor’s interest in the character of his or her tenant is protected by his right to object to the assignment on reasonable commercial grounds. Also, the original lessee will still be liable to the lessor as a surety even if the lessor consents to the assignment and the assignee expressly assumes the obligations of the lease.
A lease is a contract, and every contract has a duty of good faith and fair dealing.
Some of the factors to be considered in determining good faith and commercial reasonableness are financial responsibility of the assignee, suitability of the use for the particular property, legality of the proposed use, need for alteration of the premises, and the nature of the occupancy. Denying consent based on personal taste, convenience, or sensibility is not commercially reasonable.
The lessor cannot withhold his consent because property values had increased, making his lease below market value.

Dissent. A commercial lessor should be able to withhold his consent to an assignment or sublease arbitrarily and without reasonable cause. Otherwise, unnecessary litigation will ensue.

Discussion. In a commercial lease, the court will imply a reasonableness term when the lease gives the landlord the right to consent to an assignment or sublet of the property. By doing so, they encourage the alienability of property.