ICSC Legal Database - Cases Monday, February 22, 1999 05:02 PM Case Index: 00212 Citation: Carma Developers. Inc. v. Marathon Development California. Inc., 211 Cal. App. 3d 1360, 259 Cal. Rptr. 9 (1989) petition for review granted 264 Cal. Rptr. 824, 783 P.2d 183 (1989). Issue: Whether a landlord's exercise of a recapture clause in a commercial lease, triggered by lessee's request to sublet a portion of the premises, was an unreasonable restraint on alienation and a breach of the implied covenant of good faith and fair dealing? Facts: Defendant, lessor, entered into a ten-year commercial office lease agreement with lessee, Plaintiff. The lease contained a recapture clause which granted lessor the absolute right to terminate the lease upon lessee's request for permission to sublet a portion of the premises. Plaintiff formally requested Defendant's consent to a proposed sublease of a portion of its leased space. Defendant not only refused to consent but also advised Plaintiff that it was terminating the lease pursuant to the recapture clause. Defendant's purpose in terminating the lease was to take the value of any sublease profits for itself. Plaintiff commenced action to challenge Defendant's termination of lease. The court determined that Defendant's termination of the lease was commercially unreasonable and a breach of the implied covenant of good faith and fair dealing. Defendant appeals from that decision. Plaintiff cross-appeals as to the award of costs and expenses. Holding: Affirmed in part and remanded in part. The court first held that the recapture clause was an unreasonable restraint on alienation that contravened public policy and was, therefore, void. By engaging in a balancing test, the court determined that since Defendant could extinguish the lease by a mere request by Plaintiff for permission to assign or sublet, the actual effect of the restraint on alienation was total. At the same time, the recapture clause did not require Defendant to offer justification for its use. Thus, under a balancing test, the recapture clause was an "unreasonable" restraint on alienation and could not stand. Since no earlier case addressed the issue of restraint on alienation as applied to recapture clauses, the court analogized the case at hand to those examining restraint on alienation as applied to clauses prohibiting assignment or sublease without consent of the lessor. The court held that the rule that a lessor may not unreasonably withhold consent to an assignment or sublease, should apply to recapture clauses. Under this rule the Defendant's exercise of the clause was unreasonable as he terminated the lease purely to reap the benefits of the higher rate of rent that the sublease would have provided. Second, the court held that Defendant breached the implied covenant of good faith and fair dealing. It based this decision on the fact that Defendant's capricious and arbitrary termination of the lease deprived Plaintiff of the remaining six years of its lease. Finally, the court remanded for further consideration of Plaintiff's entitlement to costs and expenses. Publication: Legal Update Date: Winter 1989 Classification 1: Landlord and Tenant Classification 2: Classification 3: 00212 - Legal Update - Winter 1989