KENDALL v. ERNEST PESTANA INC

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Court of Appeal, First District, Division 3, California.

Jack KENDALL et al., Plaintiffs and Appellants, v. ERNEST PESTANA, INC. et al., Defendants and Respondents.

A018254.

Decided: December 21, 1984

W. Robert Morgan, Barbara Spector, San Jose, for plaintiffs and appellants. Frank P. Nicoletti, Tiernan & Nicoletti, San Jose, for defendants and respondents.

 This is an appeal from an order entered upon the sustaining of a demurrer without leave to amend.1  The two issues on appeal are:  (1) whether a lessor may arbitrarily refuse consent when a commercial lease provides that a lessee shall not assign or sublease the premises without the written consent of the lessor;  and alternatively (2) whether it was an abuse of discretion not to allow the appellants to amend their complaint.

The pleadings allege the following pertinent facts.   Lessee, Bob Bixler, requested that lessor/respondents consent to an assignment of a commercial lease to appellants.   Lessor/respondents refused to consent to the lease assignment unless the appellants agreed to a “rental in excess of the sums agreed to by the lessor and lessee” in the original lease.   The complaint alleged, and lessor/respondents admitted by their demurrer, that the appellants had a stronger financial statement, a greater net worth and are more financially desirable as lessees than the present lessee, Bob Bixler.   Lessor/respondents also admitted by their demurrer that their refusal to consent to the assignment was arbitrary and capricious.

This case is strikingly similar to a recent case this court decided—Schweiso v. Williams (1984) 150 Cal.App.3d 883, modified in 151 Cal.App.3d 776c, 198 Cal.Rptr. 238 [as modified].   In Schweiso, we decided to follow the case of Cohen v. Ratinoff (1983) 147 Cal.App.3d 321, 195 Cal.Rptr. 84, which held that where “the lease provides for assignment or subletting only with the prior consent of the lessor, a lessor may refuse consent only where he has a good faith reasonable objection to the assignment or sublease, even in the absence of a provision prohibiting the unreasonable or arbitrary withholding of consent to an assignment of a commercial lease.”   (Id., at p. 330, 195 Cal.Rptr. 84.)

Both Schweiso and Cohen recognize that they are themselves departures from the long-established rule in California that such a lease proviso had heretofore meant that the lessor may, indeed, refuse consent arbitrarily and even without a good faith reasonable objection.   The lease in question herein was written long before Schweiso and Cohen, and was interpreted by the trial court four months before the first of these decisions was filed.   For reasons which follow, we believe both Schweiso and Cohen were wrongly decided, now decline to follow them, and affirm the decision of the trial court sustaining the demurrer herein.

The plain language of the lease provides that the lessee shall not assign the lease “without written consent of Lessor first had and obtained ․  Any such assignment or subletting without this consent shall be void, and shall, at the option of Lessor, terminate this lease.”   The lease does not require that “consent may not unreasonably be withheld;”  the lease does not provide that “the lessor may refuse consent only where he has a good faith reasonable objection to the assignment.”   Neither have the parties so contracted, nor has the Legislature so required.   Absent such legislative direction, the parties should be free to contract as they see fit.

Appellant urges this court to rewrite the contract by adding a limitation on the lessor's withholding of consent—“that such consent may not be unreasonably withheld.”   He urges that such must be implied in the term “without written consent of lessor first had and obtained”;  and he places the burden on the lessor to add language to negate that, if such be his intent—language such as “such consent may be arbitrarily, capriciously and/or unreasonably withheld.”

However, it is obvious that the attorney for the lessor agreeing to such a term was entitled to rely upon the state of the law then existing in California.   And at such time (Dec. 12, 1969) it is clear that California followed the “weight of authority” in these United States and allowed such consent to be arbitrarily or unreasonably withheld absent a provision to the contrary.  (Richard v. Degen & Brody, Inc. (1960) 181 Cal.App.2d 289, 5 Cal.Rptr. 263.)   The Richard v. Degen & Brody court clearly held that the weight of authority as expressed in 51 Corpus Juris Secundum section 36 was the law of California:  “․ where a subletting or assignment of the leased premises without the consent of the lessor is prohibited, he [lessor] may withhold his assent arbitrarily and without regard to the qualifications of the proposed assignee, unless ․ the lease provides that consent shall not be arbitrarily or unreasonably withheld, and in granting his assent may impose such conditions as he sees fit.”  (Id. at p. 299, 5 Cal.Rptr. 263.)

Even those few jurisdictions and authorities which have rejected the “arbitrary and capricious” rule have at forthrightly recognized 2 that in doing so, they depart from the majority:  “The general rule throughout the country has been that when a lease contains an approval clause, the landlord may arbitrarily and capriciously reject proposed subtenants.”   (Homa-Goff Interiors, Inc. v. Cowden (Ala.1977) 350 So.2d 1035, 1037.)   See also the reporter's note to the Restatement Second of Property, section 15.2, at page 111, which proposes the very result advanced by appellants:  “The rule adopted in subsection (2) of this section that the landlord may not unreasonably withhold his consent to a transfer by the tenant is contrary to the established common-law rule that if the lease mandates the consent of the landlord to validate a transfer, and the lease does not provide for the landlord to give consent if the transferee is reasonably suitable, such consent may be withheld arbitrarily by the landlord.”

Those jurisdictions adopting the Restatement's proposed departure from the settled common law appear to do so upon the shaky public policy rationale that the consent of a lessor should not be withheld unreasonably and that to hold otherwise is to violate the principle that restraints on alienation should be narrowly construed.  (See Fernandez v. Vazquez, supra, 397 So.2d 1171;  Funk v. Funk (1981) 102 Idaho 521, 633 P.2d 586;  Shaker Building Co. v. Federal Lime & Stone Co. (1971) 28 Ohio Misc. 246, 277 N.E.2d 584;  Arrington v. Walter E. Heller International Corp. (1975) 30 Ill.App.3d 631, 333 N.E.2d 50.)   Some even cite “moral needs” (Homa-Goff Interiors, Inc. v. Cowden, supra, 350 So.2d at p. 1038) or the “increased recognition of and emphasis on the duty of good faith and fair dealing inherent in every contract” (Cohen v. Ratinoff, supra, 147 Cal.App.3d 321, 330, 195 Cal.Rptr. 84), or the egregious motive in enforcing the clause seeking “additional amounts of ‘blood’ money from the appellants as a condition of consent to the assignments” (Schweiso v. Williams, supra, 150 Cal.App.3d 883, 887, as modified in 151 Cal.App.3d 776c, 198 Cal.Rptr. 238 [as modified] ).

Some jurisdictions have overruled the common law, at least as to residential leases, by legislative action.  (See Alaska Stat., § 34.03.060 (1975);  Delaware Code Ann. tit. 25, § 5512, subd. (b) (1915);  Hawaii Rev.Stat. § 516–63 (Supp.1975).)   This would appear to be the wisest procedure, if only to effect the repeal prospectively and thereby give force to those contracts entered into when the common law prevailed.   See Justice Bloodworth's dissent in Homa-Goff Interiors, Inc. v. Cowden, supra, 350 So.2d at page 1039:  “To overturn a century and a quarter of existing real estate law without giving contracting parties ‘fair notice’ is my principal complaint with the majority's opinion.   At the very least, I think the majority ought to make the rule they have adopted ‘prospective.’ ”

However, those jurisdictions which reject the temptation to follow what the minority call “the trend” (see Fernandez v. Vazquez, supra, 397 So.2d at p. 1173) do so because they simply refuse to rewrite unambiguous language within a lease.  (B & R Oil Company, Inc. v. Ray's Mobile Homes, Inc. (1980) 139 Vt. 122, 422 A.2d 1267.)   They so refuse in order to uphold the integrity of the contract and the inalienable rights of citizens to seek and obtain enforcement thereof by the courts.   For those the motives and reasons for exercise of rights fairly contracted for are simply irrelevant:  “This commercial lease expressly provided that it could not be assigned without the landlord's consent;  there was no limitation in the lease that such consent should not be unreasonably withheld․  In the circumstances, the landlord was merely exercising its legal contractual rights in refusing to consent to an assignment of the lease unless the lease was modified to increase the rent.   Such an exercise of the landlord's legal rights does not constitute economic duress so as to entitle the tenant to damages.  [Citation.]”   (Herlou Card Shop, Inc. v. Prudential Insurance Co. of America (1979) 73 A.D.2d 708, 422 N.Y.S.2d 708 [reversing a $55,000 award to tenant].)

 Further persuading us that Cohen and Schweiso were wrongly decided is the failure of either case to discuss the history of what action the California Legislature has taken and, perhaps more importantly, not taken.   For if the Legislature has considered adopting appellant's position as the law of California and, having so considered, has rejected such a change, that refusal to act certainly implies legislative recognition and approval of current law.   And this appears to be precisely the case in California.   For in 1970 the Legislature added section 1951.4 to the Civil Code (effective July 1, 1971) to permit landlords to recover rent due under the lease when the lessee breaches and abandons if the lease permits the lessee to “[s]ublet the property, assign his interest in the lease, or both, with the consent of the lessor, and the lease provides that such consent shall not unreasonably be withheld.”  (Civ.Code, § 1951.4, subd. (b)(3), emphasis added.)   If the lease does not so provide then section 1951.2 of the Civil Code places upon the lessor the burden of retaking the premises and reletting the property in order to minimize damages.

The Law Revision Commission Comment on this addition makes clear the advantage to lessors in agreeing not to withhold consent unreasonably:  “Where the lease complies with this section, the lessor may recover the rent as it becomes due under the terms of the lease and at the same time has no obligation to retake possession and relet the property in the event the lessee abandons the property.   This allocation of the burden of minimizing the loss is most useful where the lessor does not have the desire, facilities, or ability to manage the property and to acquire a suitable tenant and for this reason desires to avoid the burden that Section 1951.2 places on the lessor to mitigate the damages by reletting the property.”  (Cal.Law Revision Com. com. § 1951.4.)

Thus, the California Legislature has considered the situation of lessors contracting for the right (and then exercising it) of unreasonably withholding consent to an assignment.   That it has provided an increased measure of damages (and thus an incentive) to those who forego this right is a clear recognition that the contractual right does exist.

 While we harbor great reverance for the doctrine of stare decisis and do not lightly reject the holdings in Cohen and Schweiso,3 we respectfully suggest that it is not for this court either in Cohen or Schweiso or the case at bar to imply a requirement of reasonableness when the Legislature specifically refused to do so 14 years earlier.

To rewrite this contract (as appellant would have us do) for the benefit of one who was not an original party thereto, and to the detriment of one who stands in privity with one who was, and to hold that there is a triable issue of fact concerning whether respondents unreasonably withheld their consent when they had already contracted for that right, creates only mischief by breeding further uncertainty in the interpretation of otherwise unambiguously written contracts.   To so hold only encourages needless future litigation.

We respectfully suggest that if California is to adopt the minority rule and reject the majority rule which recognizes the current proviso as valid, unambiguous and enforceable, that it do so by clear affirmative legislative action.   To so defer to the legislative branch, protects not only this contract but “those tens of thousands of landlords, tenants and lawyers who have relied on our unbroken line of judicial precedent.”  (Homa-Goff Interiors, Inc. v. Cowden, supra, 350 So.2d at p. 1041.)

The judgment is affirmed.

FOOTNOTES

FOOTNOTE.  

1.   No judgment of dismissal was entered, but in the interests of justice we will deem the order to incorporate a judgment of dismissal and will interpret appellants' notice of appeal as applying to the dismissal.   (See Wilson v. Household Fininance Corp. (1982) 131 Cal.App.3d 649, 651, 182 Cal.Rptr. 590;  California State Employees' Assn. v. State of California (1973) 32 Cal.App.3d 103, 106, fn. 1, 108 Cal.Rptr. 60.)

2.   But some jurisdictions are not quite so candid in abandoning the common law by judicial fiat.   See, e.g., Fernandez v. Vazquez (Fla.1981) 397 So.2d 1171 which injects “standards of good faith and commercial reasonableness” as an implied bargained for condition in these contracts;  and the court justified this action by boldly asserting, “the arbitrary and capricious rule is undergoing continued erosion”;  to support this observation it cites in footnotes 4, 5, and 6 (at p. 1173) three states (Alaska, Delaware and New York) that have departed from the common law relative to residential leases;  but these states have done so by statute.   Following this so-called “trend” by legislative action wreaks far less havoc than following it by judicial “interpretation.”

3.   Of course, had the Cohen and Schweiso courts practiced that same reverence, the well-settled rule of Richard v. Degen & Brody, Inc., supra, 181 Cal.App.2d 289, 5 Cal.Rptr. 263, would never have been questioned.

ANDERSON, Associate Justice.* FN* Assigned by the Chairperson of the Judicial Council.

SCOTT, Acting P.J., and BARRY–DEAL, J., concur.