Carma Developers (Cal.), Inc. v. Marathon Development California, Inc.

• Decision Date: 30 March 1992
• Docket Number: No. S011486,S011486
• Citation: 826 P.2d 710,2 Cal.4th 342,6 Cal.Rptr.2d 467
• Court: California Supreme Court
• Parties: , 826 P.2d 710 CARMA DEVELOPERS (CALIFORNIA), INC., Plaintiff and Appellant, v. MARATHON DEVELOPMENT CALIFORNIA, INC., Defendant and Appellant.

Page 467

6 Cal.Rptr.2d 467

2 Cal.4th 342, 826 P.2d 710

CARMA DEVELOPERS (CALIFORNIA), INC., Plaintiff and Appellant, v. MARATHON DEVELOPMENT CALIFORNIA, INC., Defendant and Appellant.

No. S011486.

Supreme Court of California In Bank.

March 30, 1992.

Horning, Janin & Harvey, Richard Allan Horning, D. Peter Harvey and Thomas C. Lee, San Francisco, for plaintiff and appellant.

Pillsbury, Madison & Sutro, Walter R. Allan, Vaughn R. Walker and Christopher R. Ball, San Francisco, for defendant and appellant.

Cox, Castle & Nicholson and W.M. Lines, Los Angeles, as amici curiae on behalf of defendant and appellant.

PUGLIA, Acting Chief Justice ¹:

At issue here is the validity of a provision in a commercial lease allowing the lessor to terminate the lease and recapture the leasehold upon notice by the lessee of intent to sublet or assign. Such a provision was included in a 10-year lease of office space between the parties to this appeal. Several years into the lease term the lessee, plaintiff and appellant Carma Developers (California), Inc. (Carma), gave notice of intent to sublease 80 percent of the demised premises. The lessor, defendant and appellant Marathon Development California, Inc. (Marathon), responded by exercising its right of termination and recapture in order to receive the benefit of the increased rental value of the leasehold.

Carma sued Marathon, inter alia, for breach of contract and of the covenant of good faith and fair dealing. The superior court summarily adjudged that "[a] 'reasonableness' standard must be read into [the termination and recapture clause] of the Lease to prevent that provision from being void as an unreasonable restraint on alienation and to prevent a forfeiture of the Lease." That court then ruled Marathon's exercise of its termination and recapture rights under the lease for the purpose of realizing the appreciated rental value was a breach of that implied "reasonableness" term and of the implied covenant of good faith and fair dealing. Issues of proximate cause and damages were submitted to a jury, which was instructed that the court had conclusively determined Marathon breached the contract and the implied covenant of good faith and fair dealing. The jury returned a verdict awarding Carma damages.

On Marathon's appeal, the Court of Appeal affirmed, holding that under this court's opinion in Kendall v. Ernest Pestana, Inc. (1985) 40 Cal.3d 488, 220 Cal.Rptr. 818, 709 P.2d 837, the termination and recapture clause of the lease was "repugnant" to the free alienability of the leasehold estate, that in exercising the clause to obtain a profit, Marathon's purpose was per se unreasonable, and that the clause was therefore void as an invalid restraint on alienation. The Court of Appeal also held there was "substantial evidence" Marathon had breached the implied covenant of good faith and fair dealing.

As explained hereafter, we shall conclude the termination and recapture clause did not pose an unreasonable restraint on alienation. We shall further conclude recent legislation resolving the rights of contracting parties to restrict alienation of commercial leases (Civ.Code, § 1995.010 et seq.) is applicable to this matter and expressly authorizes the clause in question. Thus, we shall conclude Marathon was justified in terminating the lease as permitted by its terms and such termination was not a breach of the covenant of good faith and fair dealing. We shall therefore reverse and direct that judgment be entered for Marathon.

I

Carma and Marathon are commercial real estate development companies. On November 15, 1979, Marathon leased to Carma premises consisting of the 30th floor of the building at 595 Market Street, San Francisco, California (hereafter the premises). The lease was for 10 years at a base rental of $25,072.83, or $22 per square foot per year. It contained two provisions relating to sublease or assignment by the tenant. Paragraph 15(a) provided in part: "Tenant shall not, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, assign this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use or occupancy of the Premises by any person other than Tenant."

Paragraph 15(b) provided: "Before entering into any assignment of this Lease or into a sublease of all or part of the Premises, Tenant shall give written notice to Landlord identifying the intended assignee or sublessee by name and address and specifying the terms of the intended assignment or sublease. For a period of thirty (30) days after such notice is given, Landlord shall have the right by written notice to Tenant to terminate this Lease as of a date specified in such notice, which date shall not be less than thirty (30) days nor more than sixty (60) days after the date such notice is given. If Landlord so terminates this Lease, Landlord may, if it elects, enter into a new lease covering the Premises with the intended assignee or sublessee on such terms as Landlord and such person may agree or enter into a new lease covering the Premises with any other person; in such event, Tenant shall not be entitled to any portion of the profit, if any, which Landlord may realize on account of such termination and reletting. From and after the date of such termination of this Lease, Tenant shall have no further obligation to Landlord hereunder, except for matters occurring or obligations arising hereunder prior to the date of such termination."

Initially Carma did not require the entire demised premises. The parties therefore executed a contemporaneous letter agreement permitting Carma, until such time as its needs expanded, to sublease a portion of the premises without risking termination. The letter provided: "notwithstanding the provisions of paragraph 15(b) of the Lease, Marathon agrees that it will not exercise its right to terminate the Lease as to space leased to sub-tenants for terms ending not later than December 31, 1984...." It further stated: "Except as specified in this letter, Landlord's rights and Tenant's obligations under paragraphs 15a and 15b [sic] of the lease shall remain unchanged."

Early in the lease term, Carma expended over $400,000 in tenant improvements and subleased portions of the premises to several entities. Eventually all such subleases expired and Carma occupied the entire premises. By late 1982, however, Carma decided to relocate its headquarters to Houston, Texas, and vacated most of the premises. It then sought a subtenant and contacted Marathon to determine how it would respond if Carma were to sublease. Marathon declined to answer, insisting instead that Carma submit a written notice of intent.

In March 1983, Carma wrote to Marathon requesting permission to sublet to Grubb & Ellis Company approximately 80 percent of the premises at a rate of $33.32 per square foot per year, with an option on the remaining portion in the event Carma vacated. Marathon responded with a notice of termination and then pursued a new lease agreement with Grubb & Ellis. These negotiations were unsuccessful, however, and a new tenant was not secured until approximately one year later.

After vacating the premises, Carma initiated this action, seeking damages for breach of paragraphs 15(a) and 15(b) of the lease and of the implied covenant of good faith and fair dealing and for interference with prospective economic advantage. Carma also sought a declaration of its rights and duties under the lease. Carma moved for summary adjudication of issues. The trial court granted the motion in part, concluding: (1) Marathon breached the requirement of paragraph 15(a) that consent to a sublease may not be unreasonably withheld; (2) a commercial reasonableness standard must be read into paragraph 15(b); (3) Marathon's termination of the lease in order to appropriate sublease profits was not commercially reasonable; and (4) Marathon's refusal of consent to the sublease, termination of the lease, and refusal to permit Carma to recover the unamortized value of its improvements breached the covenant of good faith and fair dealing.

The issues of proximate cause and damages and Carma's remaining claim for damages--intentional interference with prospective economic advantage--were tried to a jury. The jury was instructed on the trial court's summary adjudication findings and its conclusive finding of breach of the lease and of the covenant of good faith and fair dealing. The jury returned a verdict in favor of Marathon on the interference claim. On the remaining claims, the jury awarded damages of $14,468.83 for breach of contract--Carma's cost of moving from the premises. For breach of the covenant of good faith and fair dealing, the jury awarded $300,649.49--the unamortized value of tenant improvements. Thereafter the court awarded Carma attorney fees in the amount of $125,000, plus costs and expenses of $17,578.08, for a total judgment of $457,692.97. ²

Marathon appealed, contending the court erred in imposing a reasonableness standard on paragraph 15(b) and in concluding Marathon had breached the lease and covenant of good faith and fair dealing. Carma also appealed, contesting the attorney fees and cost awards and the denial of prejudgment interest. The Court of Appeal affirmed all but the cost award, remanding to the trial court with instructions to interpret the contract on the issue of costs.

II

Before addressing the contentions raised in this appeal, it is helpful to note what is not at issue. Despite Carma's contrary insistence, we are not tasked with interpreting ambiguous contract terms. The language of paragraphs 15(a) and 15(b) is clear and unambiguous and must govern their interpretation. (Civ.Code, § 1638.) Paragraphs 15(a) and 15(b) afford the lessor alternate courses of action upon a proposed sublease or assignment by the lessee. Paragraph 15(b) permits the lessor to terminate the lease and enter into a new...