Commercial leases generally contain provisions restricting the tenant’s right to sublease or assign his interest in the commercial property without the consent of the landlord. The California Civil Code provides that absent an express limitation in the lease, the tenant reserves the right to transfer his interest in the property. In addition, if there is uncertainty in the lease regarding the legality of an assignment, it should be construed as authorizing transferability.
Where a provision in the lease agreement specifically prohibits transfers without the landlord’s prior consent, the law requires that the refusal to consent cannot be unreasonable. This standard for withholding consent has emerged from an evolution of the law in this area. Under the traditional common law, California, along with other jurisdictions, had permitted landlords to refuse to allow a third party to assume the lease, even if the refusal was completely subjective and lacking any proper justification. Over the last 50 years, many states modified this rule to require landlords to provide a reasonable explanation for denying the proposed assignment.
In 1985, the California Supreme Court held that the landlord’s withholding of consent for a commercial property assignment must be reasonable. The decision in Kendall v. Ernest Pestana, Inc. adopted a new standard of reasonableness for transfers of commercial properties that later became codified in California’s statutory framework.
What does the reasonableness guideline entail? According to the Court, a landlord could legally withhold consent based on the following factors: the financial status of the assignee, the suitability and legality of the proposed use of the premises and whether the premises would require renovations. The determination as to whether consent has been unreasonably refused is a question of fact grounded in case law.
The court’s conclusion was based on two long-standing legal principles: (i) the general aversion of the common law to restricting the “free alienability of property”; and (ii) the implied duty of good faith and fair dealing implicit in every contract, including a lease agreement. The latter theory requires the landlord to demonstrate good faith and fair dealing when exercising the discretionary power provided to him by the contract.
