Where a contract confers on one party a discretionary power affecting the rights of the other, a duty is imposed to exercise that discretion in good faith and in accordance with fair dealing.
The City of San Jose leased space to Irving and Janice Perlitch, who in turn assigned their interest to respondent Ernest Pestana, Inc. Prior to the assignment, they subleased the space. The person subleasing, Robert Bixler, sold his business to appellants, Jack Kendall, Grady O'Hara and Vicki O'Hara, who agreed to be bound by the lease. The lease provided that written consent of the lessor was required before the lessee could assign his interest. Thus, Bixler requested consent from Pestana, who refused to the sublease. The proposed assignees, appellants, brought suit for injunctive relief and sought a declaration that the refusal to consent was unreasonable and an unlawful restraint on alienation. The trial court sustained a demurrer to the complaint and an appeal followed.
Was Pestana's refusal to give consent unreasonable and an unlawful restraint on alienation?
The state supreme court reversed, finding that where the commercial lease provided for assignment only with the prior consent of the lessor, the consent could be withheld only where the lessor had a commercially reasonable objection to the assignee or the proposed use.