May 20, 2015 Article

Enforceability of Cotenancy Clauses: Remedy or Penalty?

The California Court of Appeal weighs in the issue in regard to retail leases

by Howard Jeruchimowitz

Cotenancy clauses are common in retail leases. Their purpose is to provide tenants with a remedy in the event that a cotenancy condition is not met, such as when a specified major tenant in a shopping center fails to open or a certain percentage of occupancy is not achieved at the remainder of the shopping center. Remedies for a cotenancy failure range from being released from the obligation to open, to rent abatement, or lease termination. Recently, there have been a number of cases in which landlords have challenged remedies for alleged cotenancy failures as unenforceable penalties. Often, the challenged leases are antiquated and negotiated in a vacuum long before tenants make use of the remedies or landlords understand the impact they might have on the shopping center.

In a case of first impression, the California Court of Appeal ruled on the enforceability of a cotenancy clause in a retail lease. See Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc., 182 Cal. Rptr. 3d 235 (Cal. Ct. App. 2015). In that case, the court held that (1) the subject cotenancy clause was not unconscionable, (2) the termination remedy for failure of the cotenancy condition was enforceable because it was negotiated by two sophisticated parties and because the conditions triggering the termination right were not under the control of the landlord or the tenant, and (3) the rent abatement remedy was an unenforceable penalty because the rent that the tenant did not pay had no reasonable relationship to the tenant’s anticipated harm.

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