## Facts

- The City of San Jose leased property to Irving and Janice Perlitch, who later assigned the master lease to Ernest Pestana, Inc.
- The Perlitches entered a 25-year commercial sublease with Robert Bixler.
- The sublease barred assignment without the lessor’s prior written consent but stated no standard governing consent.
- In 1981, Bixler agreed to sell his airplane maintenance business, including the leasehold interest, to Jack Kendall, Grady O’Hara, and Vicki O’Hara.
- The proposed assignees alleged they had stronger financial resources than Bixler and were willing to assume all lease obligations.
- Bixler sought Pestana’s written consent to the assignment; Pestana refused, asserting an absolute right to deny consent.
- The proposed assignees sought declaratory relief, alleging the refusal was an unreasonable restraint on alienation and violated the implied covenant of good faith and fair dealing.
- The trial court sustained Pestana’s demurrer without leave to amend on the theory that, absent an express reasonableness limitation, the lessor could refuse consent for any reason.
- The plaintiffs appealed to the California Supreme Court.

## Issues

1. Whether, when a commercial lease requires the lessor’s consent to assignment but is silent on any standard, the lessor may arbitrarily or unreasonably withhold consent.
2. Whether an arbitrary refusal to consent constitutes an unreasonable restraint on alienation and/or a breach of the implied covenant of good faith and fair dealing.

## Decision

- The California Supreme Court reversed the order sustaining the demurrer without leave to amend.
- The court held that, in a commercial lease, a consent-to-assignment clause that provides no standard implies a requirement that consent not be withheld unreasonably.
- The lessor may withhold consent only upon a commercially reasonable objection.
- The complaint stated a cause of action because it alleged the assignees were financially stronger, would assume the lease, and consent was withheld to obtain higher rent.

## Legal Principles

- California policy disfavors unreasonable restraints on alienation; contractual limits on leasehold transfers are enforceable only to the extent they are reasonable.
- In commercial leases, when assignment requires the lessor’s consent and the lease does not grant an explicit right to refuse arbitrarily, consent may be withheld only for commercially reasonable grounds.
- The implied covenant of good faith and fair dealing supports limiting the lessor’s discretion to reasons related to legitimate property and lease-performance interests.
- Commercially reasonable bases may include concerns about the assignee’s financial responsibility, the suitability and legality of the proposed use, and protection of the premises and lease performance.
- Refusal to consent solely to extract higher rent or for reasons unrelated to protection of the lessor’s legitimate interests is not commercially reasonable.

## Conclusion

The court required commercial lessors, under consent-to-assignment clauses that are silent on standards, to act reasonably and in good faith by permitting assignment unless they have commercially reasonable objections, and it allowed the plaintiffs to proceed on allegations of an unreasonable refusal.


Kendall v. Ernest Pestana, Inc., 40 Cal. 3d 488 (Cal. 1985)