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.
The lease included paragraph 15(a), requiring the landlord's consent to any assignment or sublease, which consent could not be unreasonably withheld. 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.
Carma initially subleased portions of the premises and spent over $400,000 on tenant improvements. 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). By late 1982, Carma decided to relocate its headquarters to Houston, Texas, vacated most of the premises, and sought a subtenant.
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. Marathon responded by exercising its termination right under paragraph 15(b). It attempted to negotiate a new lease with Grubb & Ellis. Those efforts were unsuccessful. A replacement tenant was not secured until about a year later.
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. On summary adjudication, the superior court determined that a reasonableness standard applied to paragraph 15(b). It found that Marathon's termination to capture increased rental value was unreasonable and breached the covenant. The court directed the jury accordingly on liability.
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. This resulted in a total judgment of approximately $457,693 after adding attorney fees and costs. Marathon appealed. The Court of Appeal affirmed the judgment in relevant part. The Supreme Court granted review through a specially assigned panel of Court of Appeal justices due to recusals on the high court.
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