## Facts

- A shopping-center landlord, through its management company, leased premises for a dry-cleaning business under a lease allowing assignment/sublease with consent and requiring the tenant to remit one-half of any excess consideration received on an assignment or sublease.
- The original tenant later subleased the premises, with landlord approval, to commercial tenants who operated the dry-cleaning business.
- After the original tenant filed bankruptcy, the landlord asserted the bankruptcy terminated the original lease and told the subtenants they had no possessory rights unless they signed a “new” lease presented on a take-it-or-leave-it basis and represented as essentially the same.
- The new lease contained an expanded profit-sharing clause in small print requiring the tenant, upon assignment, to pay the landlord three-fourths of any consideration above the lease rent, including consideration attributed to the business and any covenant not to compete.
- The tenants agreed to sell the business for $120,000; escrow allocated $80,000 to fixtures/equipment and $40,000 to a covenant not to compete.
- The landlord demanded $30,000 as a condition of consenting to the assignment, relying on the new lease’s profit-sharing provision; the tenants refused and the landlord withheld consent.
- The tenants claimed the landlord’s refusal caused the loss of the $40,000 noncompetition component of the deal.
- After a bench trial, the trial court found the profit-sharing clause unconscionable, entered judgment for the tenants on declaratory relief, breach of lease, breach of the implied covenant, and intentional interference, and awarded $40,000 general damages and $30,000 punitive damages.

## Issues

1. Whether unconscionability under California Civil Code § 1670.5 can invalidate an express transfer/consent condition in a commercial lease, including a profit-sharing clause tied to an assignment.
2. Whether enforcing the clause and withholding consent supported tort recovery and punitive damages, including whether there was sufficient proof of malice/oppression/fraud and the landlord’s financial condition.

## Decision

- The court held unconscionability applies in commercial leasing and may invalidate an express condition on transfer.
- The court held the three-fourths profit-sharing clause was unconscionable and unenforceable as applied to assignment consideration, including amounts attributed to the business and a covenant not to compete.
- The court affirmed the $40,000 general damages award based on evidence that the landlord’s insistence on the unconscionable term caused the tenants’ loss.
- The court reversed the $30,000 punitive damages award and remanded for modification of the judgment.

## Legal Principles

- Courts may refuse to enforce, sever, or limit an unconscionable contract clause under California Civil Code § 1670.5, including in commercial contracts.
- Unconscionability analysis includes procedural factors (oppression/surprise, adhesion-style presentation, misrepresentation of material changes, small-print terms) and substantive factors (overly harsh, one-sided terms producing an unjustified landlord gain).
- A lease provision conditioning assignment consent cannot be used to extract an excessive share of a tenant’s business value unrelated to protecting the landlord’s rental interest, particularly where the landlord also retains rent-adjustment remedies.
- Breach of the implied covenant of good faith and fair dealing in an ordinary commercial lease generally sounds in contract; tort remedies require an independent tort duty (often absent without a special relationship).
- Punitive damages require a tort basis and clear and convincing evidence of malice, oppression, or fraud, and supporting proof relevant to the amount of punishment, including the defendant’s financial condition.

## Conclusion

The court enforced unconscionability limits on commercial lease transfer conditions by invalidating a landlord’s aggressive profit-sharing clause tied to assignment consent, upheld contract damages for losses caused by the landlord’s refusal to consent on that basis, and rejected punitive damages absent an independent tort duty and adequate proof supporting punitive liability.


Ilkhchooyi v. Best, 37 Cal. App. 4th 395 (Cal. Ct. App. 1995)