The question of whether a cotenancy provision is valid is one that, until recently, had not been addressed by California Courts. A cotenancy provision is commonly sought by national tenants and requires that other stores in a shopping center be occupied by operating businesses.
On January 12, 2015, the Court of Appeal published its first opinion concerning cotenancy provisions (Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc.) and concluded partially in favor of the landlord.
In Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc., the landlord, Grand Prospect Partners, L.P. (“Grand Prospect”) and tenant Ross Dress for Less, Inc. (“Ross”) entered into a retail lease which included a cotenancy provision. The provision conditioned that Ross would open a store and pay rent only if Mervyn’s remained in operation at the commencement of Ross’s lease. The provision also allowed Ross to terminate its lease if Mervyn’s ceased its operation. Mervyn’s filed bankruptcy and closed its store. Ross took possession of the premises, did not open, did not pay rent and within 12 months terminated its lease.
Grand Prospect sued Ross arguing that the cotenancy, rent abatement and termination provisions were unconscionable, or alternatively, an unreasonable penalty. The lower Court agreed with Grand Prospect’s arguments and awarded judgment in their favor in the amount of $672,100 for unpaid rent, and an additional $3,100,000 in damages caused by its termination.
Court of Appeal: Unconscionability
Unconscionability arises when one party holds a much stronger bargaining position and uses that position to oppress the weaker party within a contract. Unconscionability is determined using two means: (i) whether the contract in question is a contract of adhesion – a form contract drafted by one party wherein the weaker party has no ability to negotiate, or (ii) an examination of the circumstances surrounding the formation of the contract.
Because the terms of the cotenancy, rent abatement and termination provisions were heavily negotiated by sophisticated parties, the Appellate Court concluded that the lease and cotenancy provision were not unconscionable.
Court of Appeal: Unreasonable Penalty
As to the matter of rent abatement, a penalty cannot exceed the damages suffered. The Appellate Court ruled that Ross had suffered no damages relative to the lack of Mervyn’s tenancy, upheld the lower Court’s finding that the rent abatement provision was unenforceable and ordered Ross to pay the $672,100 for unpaid rent.
The Appellate Court found that the lease termination provision could not be deemed an unreasonable penalty based on the adoption by California Courts of a rule concerning forfeiture and termination clauses: as long as the contracting parties are sophisticated and as long as there has been no default by the contracting parties, a termination should not be deemed a forfeiture. The termination award ($3,100,000) was reversed.
Like the lease itself, a cotenancy provision evolves to meet the needs of the parties involved. There can be no blanket rule of law to cover all aspects of the cotenancy provision as illustrated by Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc.
Landlords and tenants must be mindful that a cotenancy provision in a lease may not always be enforceable.