2 Cal. 4th 342, 6 Cal. Rptr. 2d 467, 826 P.2d 710 (1992)
On November 15, 1979, Marathon Development California, Inc. leased the 30th floor of the building at 595 Market Street in San Francisco to Carma Developers (California), Inc. for a 10-year term at a base annual rent of $25,072.83.1
The lease included paragraph 15(a), requiring the landlord's consent to any assignment or sublease, which consent could not be unreasonably withheld.2 The lease also included paragraph 15(b), granting the landlord a 30-day option upon receiving notice of a proposed transfer to terminate the lease and relet the premises directly while retaining any profit from the new arrangement.3
Carma initially subleased portions of the premises and spent over $400,000 on tenant improvements.4 The parties executed a letter agreement allowing Carma to sublease space for terms ending no later than December 31, 1984, without triggering Marathon's termination right under paragraph 15(b).5 By late 1982, Carma decided to relocate its headquarters to Houston, Texas, vacated most of the premises, and sought a subtenant.6
In March 1983, Carma provided written notice to Marathon of its intent to sublease approximately 80 percent of the premises to Grubb & Ellis Company at $33.32 per square foot per year.7 Marathon responded by exercising its termination right under paragraph 15(b).8 It attempted to negotiate a new lease with Grubb & Ellis.9 Those efforts were unsuccessful.10 A replacement tenant was not secured until about a year later.11
After vacating, Carma filed suit against Marathon alleging breach of the lease provisions and the implied covenant of good faith and fair dealing, as well as interference with prospective economic advantage, and sought declaratory relief.12 On summary adjudication, the superior court determined that a reasonableness standard applied to paragraph 15(b).13 It found that Marathon's termination to capture increased rental value was unreasonable and breached the covenant.14 The court directed the jury accordingly on liability.15
The jury awarded Carma $14,468.83 for breach of contract and $300,649.49 for breach of the covenant of good faith and fair dealing.16 This resulted in a total judgment of approximately $457,693 after adding attorney fees and costs.17 Marathon appealed.18 The Court of Appeal affirmed the judgment in relevant part.19 The Supreme Court granted review through a specially assigned panel of Court of Appeal justices due to recusals on the high court.20
Whether a commercial lease provision granting the lessor a right to terminate the lease upon the lessee's notice of intent to sublet or assign constitutes an unreasonable restraint on alienation?21
Under Civil Code section 711, conditions restraining alienation are void when repugnant to the interest created.22 Reasonableness is determined by balancing the quantum of restraint against its justification under the Wellenkamp test, considering the nature of the interest created, the type of restraint, and the circumstances of its application.23
No. The interest created is a leasehold already limited in duration and scope.24 This renders any restriction less repugnant than one affecting a fee estate.25 Paragraph 15(b) imposes a forfeiture restraint.26 That restraint accelerates the lessor's reversion.27
It releases the lessee from further obligations upon termination.28 This occurred when Marathon exercised the clause after Carma's March 1983 notice of intent to sublease 80 percent of the premises.29 The quantum of restraint is not total.30 It operates only in a rising market when the lessee seeks to relocate or curtail operations.31
The benefits of the move must be outweighed by the risk of lost profits and improvements.32 Justification is ample.33 The clause reflects the parties' arm's-length bargain allocating appreciated rental value to the lessor.34 This is consistent with freedom of contract in commercial leases between sophisticated entities.35
The termination and recapture clause does not constitute an unreasonable restraint on alienation.36
Whether a lessor's exercise of a contractual termination and recapture right in a commercial lease to appropriate increased rental value breaches the implied covenant of good faith and fair dealing?37
No. Marathon's termination of the lease upon receiving Carma's notice of intent to sublease to Grubb & Ellis at the higher rate of $33.32 per square foot was expressly permitted by paragraph 15(b).40 That paragraph allowed Marathon to terminate, relet directly, and retain all profits while relieving Carma of further obligations.41 Such conduct fell squarely within the reasonable expectations of the parties at formation.42 The clause was designed to give the lessor an option to capture appreciated rental value in exchange for releasing the lessee.43
Implied terms cannot override express provisions.44 Marathon's action aligned with the lease's allocation of benefits rather than attempting to recapture opportunities forgone in the original bargain.45
The lessor's exercise of the termination and recapture right does not breach the implied covenant of good faith and fair dealing.46
Whether 1989 legislation governing transfer restrictions in commercial leases applies to and authorizes a termination and recapture clause contained in a lease executed in 1979?47
Civil Code section 1995.030 provides that the chapter governing transfer restrictions in commercial leases applies to all leases executed before, on, or after January 1, 1990.48 Section 1995.210 authorizes restrictions on transfer of the tenant's interest, and sections 1995.230 and 1995.240 expressly permit absolute prohibitions and conditions allocating excess consideration to the landlord.49
Yes. The legislation applies directly to the 1979 lease under section 1995.030.50 Paragraph 15(b) constitutes a restriction on transfer within the meaning of section 1995.020.51 It is authorized by section 1995.210 as a combination of recapture and profit-shifting provisions.52
The Legislature intended to validate such provisions.53 This is confirmed by Law Revision Commission comments referencing lessor rights to terminate and relet upon notice of a proposed sublease.54 The chapter supersedes prior restraints under section 711 for commercial leases.55 It permits even broader restrictions.56
Therefore the clause is lawful.57
The 1989 legislation applies to and authorizes the termination and recapture clause.58