Pay 'N Pak Stores, Inc. v. Superior Court

Citations: 210 Cal. App. 3d 1404; 258 Cal. Rptr. 816; 1989 Cal. App. LEXIS 530Docket: H005680

Court: California Court of Appeal; May 26, 1989; California; State Appellate Court

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In the case of Pay 'N Pak Stores, Inc. v. The Superior Court of Santa Clara County, Pay 'N Pak, as the landlord, seeks a statutory mandate review regarding a partial summary adjudication in a breach of contract lawsuit initiated by former tenants Richard and Patricia Miller. The trial court ruled that Pay 'N Pak could not legally refuse the Millers' requests to sublease to three potential tenants, which Pay 'N Pak contested based on its claim of denial regarding one tenant and its right to refuse subleases to two others that operated competing businesses.

The Millers had a lease agreement with Pay 'N Pak's predecessor, Bonanza Building Centers, which allowed them to sublet during the first six years of their ten-year lease with an option to renew. Pay 'N Pak acquired the lease in early 1983. The Millers notified Pay 'N Pak in 1986 of their intention to close their business and sought permission to sublease to The Fan Factory, Inc., Steve Adair/Inside Out, and Cal-X Spas. Pay 'N Pak acknowledged requests for the first two but denied receiving a request for Cal-X Spas, asserting that both potential sublessees sold products also offered by Pay 'N Pak.

Ultimately, the Millers successfully subleased to a dry cleaning business and subsequently filed suit against Pay 'N Pak, alleging breach of contract, breach of the covenant of good faith and fair dealing, negligence, and infliction of emotional distress. They claim damages of $31,320.80 for lost rents and related expenses, plus $1 million in punitive damages, costs, and attorney fees. Key lease provisions included a requirement for landlord consent for subletting, which cannot be unreasonably withheld, and restrictions on the use of the premises. The Millers provided evidence supporting their claims that Pay 'N Pak unreasonably withheld consent based on competition with their retail offerings.

Cal-X Spas submitted a declaration from Mike Zamani, their son-in-law, asserting he sought consent to sublease via a phone call to Pay 'N Pak's vice president, Peter Gallina, who directed him to Doug Southern, the senior vice president for finance. Southern declined consent, citing Pay 'N Pak's previous sales of spas as a concern for potential competition. However, Pay 'N Pak subsequently denied any awareness of a subleasing request for Cal-X Spas. Southern recalled only two prior sublease proposals unrelated to Cal-X's business model. 

The Millers provided an attorney's declaration with sales data for Pay 'N Pak's Blossom Hill store, indicating total sales for the fiscal years ending February 28, 1986, and the following year, alongside detailed figures for specific product categories, arguing that these sales were not substantial to Pay 'N Pak's overall business. Pay 'N Pak countered that sales percentages do not solely determine the importance of competition; the impact of product lines on store image and customer attraction is also vital. Ceiling fans, for example, serve as significant advertising tools, drawing customers who may buy additional items.

The trial court ruled that Pay 'N Pak had no legal basis to refuse consent for the Millers' sublease requests. However, the summary judgment was contested. It was determined that factual disputes existed regarding whether consent was requested for Cal-X Spas, making summary adjudication inappropriate. Additionally, the comparison of sales volumes between Pay 'N Pak and potential competitors raised factual issues about the company's commercial reasonableness in rejecting subleases. Ultimately, the ruling hinged on whether Pay 'N Pak could legally deny consent based solely on the operation of a competing business.

The Millers rely on the ruling in *Kendall v. Ernest Pestana, Inc.* to argue against a landlord's ability to unreasonably withhold consent for subleasing. The court in *Kendall* determined that, without a lease provision preventing unreasonable withholding of consent, a landlord cannot do so, based on contract law principles mandating good faith and a common law aversion to unreasonable restraints on alienation. The Millers, however, misinterpret language from *Kendall* that suggests lease clauses restricting subleasing are not meant for general economic protection but to safeguard the landlord's interests in the property. The case did not concern a landlord refusing to lease to a competitor, nor did it address whether such a refusal is inherently unreasonable. The context of *Kendall* involved landlords attempting to exploit increased rental values through subleasing, which the court deemed unfair. The decision highlights that while landlords cannot deny subleasing for general economic gain, they may protect their specific interests related to property management and tenant relations, including preventing competition that could harm their business. This argument is particularly relevant here, as the property in question is within the same shopping center as the landlord's business, indicating a potential for legitimate concerns regarding competition impacting the landlord's interests.

Reasonable use restrictions in leases are valid and enforceable, as established in Chandler v. Hart and Stockton Dry Goods Co. v. Girsh. Pay 'N Pak’s refusal to consent to competing subleases can be viewed as a reasonable effort to ensure compliance with lease covenants, including restrictions on property use. The lease permitted only baby-related items or office use, which does not compete with Pay 'N Pak's business. By denying subleasing to competitors, Pay 'N Pak does not gain any additional economic benefit but rather protects its existing rights under the master lease.

Pay 'N Pak's actions do not constitute unreasonableness under the law and invoke its bargained-for right to restrict property use. Although Pay 'N Pak did not strictly enforce the use restriction with the Millers, this does not negate the protection afforded by the lease. The refusal to consent to competitors is justified as it aligns with the lease's express powers of reasonable consent withholding and use restriction. The issue of reasonableness regarding Pay 'N Pak’s conduct is a factual matter for determination.

The Millers argue that California courts typically do not imply covenants against competition in leases, yet this does not prevent the landlord from reasonably refusing sublease consent. Consequently, a peremptory writ of mandate will issue, instructing the respondent court to deny the Millers’ motion for summary adjudication. Pay 'N Pak is awarded costs as the prevailing party.