Opinion
Transferred for Determination of Petition for Review Sept. 26, 1989.
Review Granted Oct. 31, 1989.
Page1148
[Copyrighted Material Omitted]
Page1149
COUNSEL
Horning, Janin & Harvey, Richard Allan Horning, D. Peter Harvey, Thomas C. Lee, San Francisco, for plaintiff and appellant.
Pillsbury, Madison & Sutro, Walter R. Allan, Vaugn R. Walker, Christopher R. Ball, San Francisco, for defendant and appellant.
Page1150
OPINION
PREMO, Associate Justice.
Marathon Development California, Inc. (Marathon) appeals from the judgment below holding that its exercise of the recapture clause in a commercial lease was commercially unreasonable and a breach of the implied covenant of good faith and fair dealing. Carma Developers (California), Inc. (Carma) cross-appeals, contending it is entitled to greater attorney fees and costs than what the trial court awarded and to prejudgment interest. We affirm in both appeals, except as to the matter of costs and expenses. We remand for further consideration of the cost issue.
FACTS
On November 15, 1979, Marathon, as lessor, and Carma, as lessee, entered into a 10-year commercial lease agreement covering the 30th floor of the building owned by Marathon at 595 Market Street in San Francisco. In pertinent part, Paragraph 15 of the lease provides:
"(a) Tenant shall not, without the prior written consent of the 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....
"(b) 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...."
In early 1983, Carma asked Marathon if it would consent to a sublease of a portion of the 30th floor. Marathon replied it did not answer "hypothetical questions."
On March 11, 1983, Carma wrote Marathon to formally request its consent to a proposed sublease of a portion of the 30th floor to Grub and
Page1151
Ellis Company. Marathon did not consent. Instead, it advised Carma that effective May 31, 1983, the lease was terminated, pursuant to paragraph 15(b) of the lease. Marathon's purpose in terminating the lease was to take the value of any sublease profits for itself. It did not matter to Marathon that Carma had used only less than four years of its ten-year lease and that Carma would lose all of the $400,000 it had expended on tenant-installed improvements.
Carma vacated the premises and filed the instant complaint for breach of contract, declaratory relief, negligent and intentional interference with prospective economic advantage, and breach of the implied covenant of good faith and fair dealing. Carma moved for summary adjudication of issues. The court granted the motion and determined that Marathon's termination of the lease was not commercially reasonable, constituted breach of contract, and violated the implied covenant of good faith and fair dealing. A limited trial by jury was held on the issue of proximate cause and damages. The jury returned a verdict for Carma in the amount of $315,118.32.
Marathon based its termination of the lease entirely on paragraph 15(b) of the lease agreement. Marathon contends such provision gave it the absolute right to terminate the lease by the mere fact, without more, that Carma requested Marathon's permission to sublet a portion of its space. The validity of paragraph 15(b) is, therefore, the decisive issue. For the reasons we discuss below, we hold that paragraph 15(b) unreasonably restrains alienation and thus contravenes public policy; it is, therefore, void.
DISCUSSION
Unreasonable Restraint on Alienation
The paramount issue before us is whether a recapture clause in a commercial lease which grants to the lessor the absolute right to terminate the lease upon the lessee's request for permission to sublet a portion of the premises, is valid. We hold that as a matter of public policy it is not.
Civil Code section 711 states: "Conditions restraining alienation, when repugnant to the interest created, are void."
We start with the question of whether a leasehold right is alienable property within the meaning of Civil Code section 711. This is not a new question. In Kendall v. Ernest Pestana, Inc. (1985) 40 Cal.3d 488, 494, 220 Cal.Rptr. 818, , the Supreme Court said that "[t]he law generally favors free alienability of property, and California follows the common law rule that a leasehold interest is freely alienable. [Citations.]"
Page1152
Because a leasehold right is freely alienable, it follows that any condition restraining its alienability is repugnant thereto. However, it was held in Superior Motels, Inc. v. Rinn Motor Hotels, Inc. (1987) 195 Cal.App.3d 1032, 1059, 241 Cal.Rptr. 487, that Civil Code section 711 "does not prohibit all restraints on alienation, only those which are unreasonable, i.e., not necessary to protect a security or prevent it from being impaired. [Citations.]" Ultimately, then, the issue is one of reasonableness of the restraint. In Wellenkamp v. Bank of America (1978) 21 Cal.3d 943, 948-949, 148 Cal.Rptr. 379, , the Supreme Court said that "a direct relationship exists between the justification for enforcement of a particular restraint on the one hand, and the quantum of restraint, the actual practical effect upon alienation which would result from enforcement, on the other. Thus, the greater the quantum of restraint that results from enforcement of a given clause, the greater must be the justification for that enforcement."
Here, since Marathon can extinguish the lease by the mere occurrence of the request for permission to assign or sublet, alienation of the leasehold right is in effect forbidden. The quantum of restraint is, therefore, total. For such total restraint, paragraph 15(b) requires no justification whatsoever. Indeed, Marathon contends it can be as arbitrary as it wants. We conclude that under the Wellenkamp requirement of balancing restraint against justification, paragraph 15(b) cannot stand.
Although no earlier case had addressed the issue of restraint on alienation as applied to recapture clauses, other cases had examined the issue as applied to assignment and subletting clauses in commercial leases. In Cohen v. Ratinoff (1983) 147 Cal.App.3d 321, 195 Cal.Rptr. 84, Schweiso v. Williams (1984) 150 Cal.App.3d 883, 198 Cal.Rptr. 238, and Kendall v. Ernest Pestana, Inc., supra, 40 Cal.3d 488, 220 Cal.Rptr. 818, , the common issue was whether a lessor may arbitrarily refuse to give consent to a sublease where the commercial lease provides that the lessee shall not assign or sublet the premises without the written consent of the lessor. It was held in those cases that the lessor may not do so, even if the lease does not provide that the lessor may not unreasonably refuse such consent.
Cohen was the first to apply this rule in California. Before Cohen, the Second Appellate District had held in Richard v. Degen & Brody, Inc. (1960) 181 Cal.App.2d 289, 298-299, 5 Cal.Rptr. 263, that where the lease prohibits the subletting or assignment of the leased premises without the consent of the lessor, the lessor may withhold consent arbitrarily, unless the lease provides that consent shall not be arbitrarily or unreasonably withheld. (Id. at pp. 298-299, 5 Cal.Rptr. 263.) However, 23 years later the same court, faced with the same
Page1153
issue in Cohen reversed direction, and held that "where ... the lease provides for assignment or subletting only with the prior consent of the lessor, a lessor may refuse consent only where he has a good faith reasonable objection to the assignment or sublease, even in the absence of a provision prohibiting the unreasonable or arbitrary withholding of consent to an assignment of a commercial lease." (Cohen v. Ratinoff, supra, 147 Cal.App.3d at p. 330, 195 Cal.Rptr. 84.) In reversing itself, the court noted that "[s]ince Richard v. Degen & Brody, Inc. was decided, ... there has been an increased recognition of and emphasis on the duty of good faith and fair dealing inherent in every contract." (Id. at p. 329, 195 Cal.Rptr. 84.)
In Schweiso, the First Appellate District, confronted with lease provisions identical to those involved in Cohen, followed Cohen, adding: "We are no longer in the days of caveat emptor even as to commercial leases. In recent times the necessity of permitting reasonable alienation of commercial space has become paramount in our increasingly urban society." (Schweiso v. Williams, supra, 150 Cal.App.3d at p. 887, 198 Cal.Rptr. 238.)
The issue finally reached the Supreme Court in Kendall. There, the court held that "both the policy against restraints on alienation and the implied contractual duty of good faith and fair dealing militate in favor of adoption of the rule that where a commercial lease provides for assignment only with the prior consent of the lessor, such consent may be withheld only where the lessor has a commercially reasonable objection to the assignee or the proposed use." (Kendall v. Ernest Pestana, Inc., supra, 40 Cal.3d at pp. 506-507, 220 Cal.Rptr. 818, .) As to what is a commercially reasonable objection, the Kendall court held that "[d]enying consent solely on the basis of personal taste, convenience or sensibility is not commercially reasonable. [Citations.] Nor is it reasonable to deny consent 'in order that the landlord may charge a higher rent than originally contracted for.' [Citations.] This is because the lessor's desire for a better bargain than contracted for has nothing to do with the permissible purposes of the restraint on alienation--to protect the lessor's interest in the preservation of the property and the performance of the lease covenants. ' "[T]he clause is for the protection of the landlord in its ownership and operation of the particular property--not for its general economic protection." ' [Citations.]" (Id. at p. 501, 220 Cal.Rptr. 818, .) In a footnote, the court said that "our holding applies equally to subleases." (Id. at p. 492, fn. 2, 220 Cal.Rptr. 818, .)
Although Cohen, Schweiso, and Kendall dealt with clauses prohibiting assignment or sublease without the consent of the lessor, rather than recapture clauses, we do not hesitate to extend the rule they propound to recapture clauses because both clauses involve the same public policy issue of unreasonable restraint on alienation, with recapture clauses exerting the greater
Page1154
quantum of restraint. In other words, if a lessor may not unreasonably withhold consent to an assignment or a sublease, there is even more reason why he/she should not be allowed to terminate the lease without a commercially reasonable justification, since termination is much more drastic than simply withholding consent. The law does not favor forfeitures, and forfeiture provisions in leases must be strictly construed. (McNeece v. Wood (1928) 204 Cal. 280, 267 P. 877.)
Nevertheless, "[w]hether a condition is reasonable, i.e., necessary to protect a party's security in a given transaction, is a question of fact, one whose resolution must be based upon evidence directed to that issue. (See La Sala v. American Sav. & Loan Assn. (1971) 5 Cal.3d 864, 878-884, 97 Cal.Rptr. 849, ... ['[W]e cannot rule upon the validity of a ... clause in the abstract.... [i]t is not so much that clause itself as the ... application of it that will effect an invalid restraint on the alienation of property.']....)" (Superior Motels, Inc. v. Rinn Hotels, Inc., supra, 195 Cal.App.3d at p. 1059, 241 Cal.Rptr. 487.)
Here, Marathon terminated the lease purely for economic reasons (i.e., it wanted to get for itself the higher rate of rent that the sublease would have provided to Carma), not because the termination would protect its interest in the preservation of the property and the performance of the lease covenants. Such justification is not commercially reasonable, as held in Kendall, Cohen, and Schweiso.
We therefore conclude that paragraph 15(b) unreasonably restrains alienation, contravenes public policy, and thus is void as a matter of law.
Implied Covenant of Good Faith and Fair Dealing
We turn next to the issue of whether Marathon violated the implied covenant of good faith and fair dealing. We hold it did.
In California, the rule is well settled that " '[i]n every contract there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract....' [Citations.]" (Kendall v. Ernest Pestana, Inc., supra, 40 Cal.3d at p. 500, 220 Cal.Rptr. 818, .)
Marathon's termination of the lease unquestionably resulted in destruction of, or injury to, the right of Carma to receive the fruits of its lease which still had six years to run. Marathon's response of outright termination to Carma's request for permission was capricious and arbitrary. Earlier, Carma had asked Marathon if it would consent to a sublease.
Page1155
Marathon refused to answer, saying it did not answer hypothetical questions. When Carma submitted a formal request for permission, Marathon, without warning, terminated the lease. Marathon's conduct was not consistent with good faith and fair dealing. We find in the record substantial evidence to support the trial court's conclusion that Marathon breached the implied covenant of good faith and fair dealing.
No Triable Issue of Fact
Marathon contends the trial court erred in granting Carma's motion for summary adjudication of issues because its opposition thereto established triable issues of fact. We disagree.
Code of Civil Procedure section 437c, subdivision (c), provides: "The motion for summary judgment shall be granted if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law...." Here, the evidence submitted by Marathon in opposition to Carma's motion for summary adjudication of issues consisted mainly of declarations of witnesses to the effect that recapture provisions in commercial leases are widely used in the industry and are regarded by the real estate community as reasonable. Such evidence is both irrelevant and conclusory on the issue of validity of paragraph 15(b), which is an issue of law. Granted that recapture clauses are widely used in the industry, usage does not validate what the law and public policy condemn as illegal. "[A] law established for a public reason cannot be contravened by a private agreement." (Civ.Code, § 3513.) In light of our determination that the recapture clause in question contravenes Civil Code section 711 and public policy as a matter of law, the trial court did not err in granting Carma's motion for summary adjudication of issues.
Attorney Fees
On cross-appeal, Carma contends the trial court erred in awarding it attorney fees in the amount of $125,000, instead of the $341,996.50 it had requested. The contention is without merit.
The fee arrangement between Carma and its attorneys was on a contingency basis: 35% of the first $300,000, and 45% of the remainder of the jury verdict. The jury returned a verdict of $315,118.32, essentially the value of the improvements and moving costs. This meant $111,803.24 in attorney fees, pursuant to the percentage schedule in the contingency fee agreement. The award of the trial court in the amount of $125,000 was $13,000 more than what the contingency agreement allowed.
Page1156
Carma contends this was error because its attorneys and their paralegals and law clerks had spent more time on the case than was anticipated (a total of 2,085.3 hours), and so the reasonable award for attorney fees should be $341,996.50, pursuant to the factors set forth in Aetna Life & Casualty Co. v. City of Los Angeles (1985) 170 Cal.App.3d 865, 880-881, 216 Cal.Rptr. 831, which include, "among other things, the number of hours spent on the case, reasonable hourly compensation for the attorney, the novelty and difficulty of the questions involved, the skill displayed in presenting them, the extent to which the litigation precluded other employment by the attorney, and the contingency nature of the fee award. [Citations.] The amount involved and the results obtained are also factors." Carma says its costs and expenses totalled $51,111.67. Carma further says that Marathon spent for attorney fees amounts comparable to what Carma is now claiming, thus further demonstrating the reasonableness of Carma's claim.
The standard of review for attorney fee awards is abuse of discretion. Unless there is abuse of discretion, the determination of what constitutes reasonable attorney fees is committed to the discretion of the trial court. (Melnyk v. Robledo (1976) 64 Cal.App.3d 618, 623, 134 Cal.Rptr. 602.) " 'Verdicts and judgments for the reasonable value of attorneys' services are usually upheld. The only basis for reversal would be that the amount was so large (or so small) as to "shock the conscience" and suggest that passion and prejudice influenced the determination....' (1 Witkin, Cal.Procedure (1954) Attorneys § 35, p. 43.)" (Shannon v. Northern Counties Title Ins. Co. (1969) 270 Cal.App.2d 686, 688-689, 76 Cal.Rptr. 7.)
Here, there is no reason to believe that Carma's lawyers did not themselves take into account in advance the Aetna factors when they established the terms of their own contingency fee agreement. Carma's lawyers knew when they took the case on contingency "that the question presented by the litigation--the enforceability of a 'recapture' clause in a commercial office lease--had never been litigated before in California or elsewhere...." Thus, the uncertainty not only of the outcome of the litigation but also of its costs in terms of attorneys' time and efforts, considering the novelty of the question, was evidently taken into account by Carma's attorneys when they set the terms of their contingency fee arrangement. Carma's attorneys cannot, therefore, question the reasonableness of those terms. Hence, if the trial court took into account the contingency fee arrangement in fixing its award, it did not abuse its discretion; it simply confirmed the reasonableness of the contingency fee terms. " ' "What is a reasonable fee for such services is first committed to the sound discretion of the trial judge. An appellate court can only interfere with the
Page1157
decision of the trial court as to what constitutes reasonable attorney's fees where there has been a plain and palpable abuse of discretion. [Citations.]" ' [Citations.]" (Shannon v. Northern Counties Title Ins. Co., supra, 270 Cal.App.2d at p. 687, 76 Cal.Rptr. 7.) "The trial judge is in the best position to evaluate the services rendered by an attorney in his courtroom; his judgment will not be disturbed on review unless it is clearly wrong. [Citation.]" (Vella v. Hudgins (1984) 151 Cal.App.3d 515, 522, 198 Cal.Rptr. 725.) We do not find the trial court's award clearly wrong or an abuse of discretion; to the contrary, it is supported by substantial evidence.
Costs and Expenses
Carma contends the trial court erred in awarding it only $17,578.08 of the $51,111.67 it applied for as costs and expenses. We find the record inadequate for a resolution of this issue.
Carma claims it is entitled to all costs and expenses incurred in the litigation, including costs not allowable under Code of Civil Procedure section 1033.5(b), because that was what the parties agreed to in paragraph 23 of the lease. The trial court correctly observed the question was one of contract interpretation. However, it did not proceed to interpret the contract. Without stating the basis for its conclusion, the trial court in a minute order awarded Carma $17,578.08 for costs and expenses. The record does not show which of the items submitted by Carma were approved and which were not. While we can independently determine the intent of the contracting parties where the interpretation of the agreement does not turn on the credibility of extrinsic evidence and does not require a resolution of a conflict in that evidence (Gerlund v. Electronic Dispensers International (1987) 190 Cal.App.3d 263, 270, 235 Cal.Rptr. 279), the trial court's failure to ascertain the intention of the parties and to state how it arrived at that determination, compounded by its failure to state which of the submitted costs and expenses were approved and which were not, leaves this court with virtually nothing to review.
Paragraph 23 of the lease provides: "In the event of any action or proceeding at law or in equity between Landlord and Tenant to enforce any provision of this Lease or to protect or establish any right or remedy of either Landlord or Tenant hereunder, the unsuccessful party to such action or proceeding shall pay to the prevailing party all costs and expenses, including reasonable attorneys' fees, incurred in such action or proceeding and in any appeal in connection therewith by such prevailing party, and if such prevailing party shall recover judgment in any such action, proceeding or appeal such costs, expenses and attorneys' fees shall be included in and as a part of such judgment."
Accordingly, we remand this issue to the trial court for a determination by that court of what paragraph 23 of the lease means, stating the basis of that
Page1158
determination, and also for that court to state which of the submitted costs and expenses are approved and which are not.
No Prejudgment Interest
Finally, Carma contends the trial court erred in denying its application for prejudgment interest. There was no error. Prejudgment interest is allowed only where the damages are "certain, or capable or being made certain by calculation." (Civ.Code, § 3287, subd. (a).) Damages are considered certain " 'where there is essentially no dispute between the parties concerning the basis of computation of damages ...' [citation]...." (Canavin v. Pacific Southwest Airlines (1983) 148 Cal.App.3d 512, 524, 196 Cal.Rptr. 82.) Here, there was dispute on the proper basis of computation. Carma wanted the computation made on the basis of the cost of installing the improvements, less appropriate amortization credits. Marathon, on the other hand, maintained that the improvements had nominal value on the open market and that such value depended on Carma's ability to find a successor tenant willing to pay for them. The evidence on the value of the improvements was seriously disputed and conflicting. Carma itself claimed actual damages in excess of $1,000,000, but proved only $315,118.32. The disparity between Carma's claim and the award shows that the amount of damages was far from certain or being made certain. "Where the person liable does not know what sum he owes and where damages can be arrived at only by judicial determination on conflicting evidence, the damages are uncertain and there is no basis for the award of prejudgment interest. [Citations.]" (Block v. Laboratory Procedures, Inc. (1970) 8 Cal.App.3d 1042, 1046-1047, 87 Cal.Rptr. 778.) The trial court did not, therefore, abuse its discretion in denying Carma's application for prejudgment interest.
We remand to the trial court the singular issue of Carma's entitlement to "costs and expenses," consistent with our discussion above. In all other respects, the judgment is affirmed. Each party is to bear its own costs on appeal.
BRAUER, Acting P.J., and CAPACCIOLI, J., concur.