Pay 'N Pak Stores, Inc. v. Superior Court
210 Cal. App. 3d 1404, 1989 Cal. App. LEXIS 530, 258 Cal. Rptr. 816 (1989)
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Rule of Law:
A commercial landlord does not act unreasonably as a matter of law by withholding consent to a sublease solely on the grounds that the proposed subtenant is a direct business competitor. Protecting the landlord's own business from competition in the same commercial center can be a commercially reasonable justification for refusing consent.
Facts:
- On December 4, 1981, Richard and Patricia Miller leased commercial property from Bonanza Building Centers, Inc. to operate a children's apparel store called Baby Wear Outlet.
- The lease stipulated that the landlord's consent to a sublease or assignment could not be unreasonably withheld.
- The lease also contained a use clause restricting the premises to the sale of children's apparel, furniture, and accessories, or for office use.
- In early 1983, Bonanza assigned the lease to Pay 'N Pak Stores, Inc., which operated its own home improvement store within the same shopping center.
- In the spring of 1986, the Millers decided to close their business and sought to sublease the property.
- The Millers requested permission from Pay 'N Pak to sublease to The Fan Factory, Inc. and to Steve Adair/Inside Out.
- Pay 'N Pak denied consent to both proposed subleases on the basis that each business sold products, such as ceiling fans and fireplace inserts, that would directly compete with Pay 'N Pak's store.
Procedural Posture:
- Richard and Patricia Miller (plaintiffs) sued Pay 'N Pak Stores, Inc. (defendant) in California superior court (trial court) for breach of contract and other claims.
- The Millers filed a motion for partial summary adjudication on the issue of whether Pay 'N Pak's refusal to consent was lawful.
- The trial court granted the Millers' motion, ruling that Pay 'N Pak had no legal right to refuse consent to the proposed subleases.
- Pay 'N Pak (petitioner) sought a statutory writ of mandate from the California Court of Appeal, asking it to review and overturn the trial court's order.
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Issue:
Does a commercial landlord act unreasonably as a matter of law by withholding consent to a sublease solely because the proposed subtenant operates a business that directly competes with the landlord's own business in the same shopping center?
Opinions:
Majority - Premo, Acting P. J.
No, a commercial landlord's refusal to consent to a sublease with a competitor is not unreasonable as a matter of law. While a landlord cannot unreasonably withhold consent for general economic protection, such as trying to capture the increased market value of a lease, protecting one's own business from direct competition is a specific interest related to the ownership and operation of the particular property. The court distinguished this case from Kendall v. Ernest Pestana, Inc., noting that Kendall proscribed withholding consent to extract a higher rent, not to prevent competition. Here, the original lease restricted the use to a non-competing business (a baby store), so by refusing a competing subtenant, Pay 'N Pak was merely maintaining the benefit of the bargain it was already entitled to under the lease. The determination of whether the landlord's refusal was commercially reasonable is a question of fact that cannot be decided on summary judgment, as it involves assessing factors beyond mere sales volume, such as a product line's ability to draw customers.
Analysis:
This decision significantly clarifies the 'commercial reasonableness' standard for withholding consent to a sublease, as established in Kendall v. Ernest Pestana, Inc. It carves out protection from direct competition as a potentially valid reason for a landlord to refuse a subtenant, especially when the landlord also operates a business on the property. The ruling shifts the legal inquiry from a per se rule to a fact-intensive analysis of what constitutes reasonable competition. This provides commercial landlords with a stronger basis to control the tenant mix in their properties to protect their own business interests, while requiring tenants to show that a landlord's competition concerns are factually unreasonable to succeed in a dispute.
