OPEN! OPEN! OPEN!
Enforceability of Co-Tenancy Provisions in California Retail Leases
By Winnie Ward
Co-tenancy provisions often appear in retail lease agreements with national and
stronger regional tenants in California shopping centers. These provisions provide
remedies for such tenants in the event that certain other tenants either fail to open for
business or cease to operate and vacate the shopping center. In February 2015, a
California Court of Appeal ruled on the enforceability of these provisions in Grand
Partners, L.P. v. Ross Dress for Less, Inc. et al., that will have a significant impact on
the future interpretation (and potentially, the negotiation) of such provisions.
Specifically, landlords and tenants should pay close attention to the negotiated
remedies for the violation of a co-tenancy provision, because under this holding, the
enforceability of such remedies is highly fact-specific.
Facts and Trial Court Ruling
In April 2008, the parties entered into a 10-year lease, following a 2½-year negotiation.
The lease conditioned Ross’s obligation to open for business and pay rent upon
Mervyn’s (another tenant in the shopping center) remaining open for business. This cotenancy provisions provided for rent abatement and an option to terminate the lease if
Mervyn’s failed to remain open.
In July 2008, Mervyn’s declared bankruptcy and closed its store. In May 2010, Ross
sent a 30-day notice terminating its lease. Ross never opened its store nor paid any of
its monthly rent payments, claiming both its rent abatement rights and termination rights
due to a failure of the Mervyn’s co-tenancy requirement. The landlord filed suit for
recovery of rent under the full 10-year term of the lease, arguing that the co-tenancy
provision was unenforceable.
The trial court found that the co-tenancy provisions were “unconscionable” and
therefore unenforceable, and awarded the landlord damages for both the abated rent
and the termination of the lease in the amount of almost $3.8 million. Ross appealed
the ruling, and was supported in its appeal by “amicus” (“Friend of the Court”) briefs filed
by the California Retailers Association, The Gap, Bed Bath & Beyond, Petco and VF
Outdoor, Inc. (parent company of L.L. Bean and Patagonia).
Appellate Holding
With regard to the landlord’s argument that the co-tenancy provision was
unconscionable, the appellate court overruled the trial court, holding that in this instance
the co-tenancy provision was enforceable, given that both parties entered into the lease
voluntarily and without coercion, even though it acknowledged that Ross did have
greater bargaining strength.
The landlord further argued that (a) the lease termination clause amounted to a
“forfeiture”, and that the landlord therefore should be entitled to damages, and (b) the
rent abatement was an unenforceable penalty. As to the forfeiture argument, the Court
found that because the lease termination clause has been negotiated between
sophisticated parties, and that the landlord had no control over whether Mervyn’s
vacated its premises, Ross’s termination of the lease did not amount to a “forfeiture”,
and the landlord was not entitled to damages. With regard to the rent abatement
provision, however, the Court held that Ross failed to prove that the amount of the rent
abatement had any relationship to Ross’s actual “damages” due to Mervyn’s closing. In
fact, Ross was unable to prove it had any such damages. Therefore, the landlord was
entitled to damages equal to the 13-month rent abatement period at the beginning of the
lease term, totaling $672,100, but not the $3.1 million in damages for termination of the
lease that the lower court awarded.
The Importance of a Well-Drafted Document
The takeaway from this case is that the enforceability of co-tenancy provisions are factspecific. In order to enforce a rent abatement remedy, a tenant should be prepared to
prove that the rent abated had some relationship to the damages the tenant suffered
due to the co-tenancy condition not being fulfilled. Also, whether or not a landlord has
the ability to require the co-tenant to remain open might impact the enforceability of a
tenant’s termination right, although the court was silent on what impact such control
would have on the termination right. Landlords and tenants, and their counsel, should
carefully consider the co-tenancy language in future leases in light of this decision.
Winnie Ward is a named partner of Stewart Ward & Josephson LLP. She specializes in office,
retail and industrial commercial leasing, as well as real property acquisition and divestment.
Ms. Ward currently serves as a Director at Large on the Board of Directors for the Association
of Commercial Real Estate. wward@swjllp.com; 916-569-8161