Whether a commercial lessor may arbitrarily withhold consent to an assignment when the lease requires prior written consent but does not expressly say that consent may not be unreasonably withheld.
Holding
No. Absent a freely negotiated provision giving the lessor absolute discretion, a commercial lessor may withhold consent only for a commercially reasonable objection to the proposed assignee or proposed use.
Reasoning
California begins with the rule that a leasehold is freely alienable. Although a consent clause serves a legitimate purpose by allowing a lessor to protect its reversionary interest and ensure that a suitable party possesses and manages the property, restraints on alienation are strictly construed against the lessor. An approval clause becomes an unreasonable restraint when the lessor uses it arbitrarily rather than to protect those legitimate interests.
The Court adopted the modern minority rule reflected in the Restatement (Second) of Property and in recent decisions from other jurisdictions. A landlord has a legitimate interest in the identity and qualifications of an incoming tenant, but that interest does not justify refusing consent without any reason. The lessor remains protected because the original lessee ordinarily remains liable as a surety after a consented-to assignment.
A lease is also a contract, and every contract includes an implied covenant of good faith and fair dealing. When one contracting party has discretionary power that affects the other's contractual rights, that discretion must be exercised in good faith. A tenant who has retained a qualified right to assign, subject to consent, may reasonably expect that consent will not be withheld for arbitrary reasons.
Commercial reasonableness is ordinarily a factual question. Relevant considerations include the proposed assignee's financial responsibility, the suitability and legality of the intended use, the need for alterations, and the nature of the proposed occupancy. Personal taste, convenience, or sensibility alone is not enough.
A lessor also may not withhold consent simply to extract increased rent or other economic concessions beyond the bargain already made. That objective does not protect the property or ensure performance of lease covenants; it merely enables the lessor to capture the tenant's favorable lease bargain. The lessor could instead have negotiated rent escalations or an express, freely negotiated allocation of appreciation when the lease was formed.
The Court rejected the argument that the plain language of a standard consent clause unambiguously reserves absolute discretion. A clause allowing assignment with consent naturally contemplates that consent can be obtained, and the implied covenant supplies a good-faith limit on discretionary approval. Applying that covenant therefore does not improperly rewrite the parties' agreement.
The Court also rejected reliance on prior California appellate authority and on Civil Code section 1951.4. The state Supreme Court had never adopted the older majority rule, and common-law rules may be changed when reason and equity require it. Section 1951.4's express requirement of a reasonableness clause for a particular statutory remedy did not codify an opposite common-law rule or prevent judicial reconsideration of the issue.