Are Co-tenancy Agreements Enforceable?

By: Roland J. Amundsen

A recent decision by the California Court of Appeal answers this question to a large extent, and the answer is... it depends!

In Grand Prospect Partners LP v. Ross Dress for Less, Inc. (2015) 182 Cal. Rptr. 3d 235, the Court looked at a co-tenancy clause agreed upon by two sophisticated parties to a commercial retail lease, and addressed the issues of whether the clause was unconscionable and/or an unenforceable penalty. It found that despite the relatively equal sophistication of the two parties, under some circumstances, the co-tenancy agreement can constitute an unreasonable penalty and be unenforceable, although it may not be unconscionable.

Ross Dress for Less (Ross) signed a commercial lease with a sophisticated landlord called Grand Prospect Partners LP (landlord) wherein Ross agreed to lease space at a commercial retail shopping center, contingent on the "anchor" tenant, Mervyn's, being a co-tenant. Not long after the lease was signed, Mervyn's filed for bankruptcy and later closed their store at that retail shopping center location. Ross exercised its rights under the lease and did not move into the retail space and did not pay rent. The landlord sued, alleging that Ross was obligated to pay rent for the full 10 year term of the lease because the lease terms authorizing rent abatement and termination were unconscionable or, in the alternative, an unreasonable penalty and thus unenforceable.

The landlord won at the trial level with a jury verdict of roughly $3.8 million, comprised of $672,100 for unpaid rent and approximately $3.1 million in other damages. Both parties appealed and the Court of Appeal affirmed in part and reversed in part, reducing the damages to $672,100. This represented the unpaid rent only.

The Court of Appeal noted that there was no unconscionability because such a finding requires both procedural and substantive unconscionability. Because both parties were sophisticated and experienced in the negotiation of commercial leases, and the terms were reached by way of a free and unpressured choice, there was no procedural unconscionability in the transaction. The agreement was not unenforceable on unconscionability grounds.

The Court also noted that as a general rule, a contractual provision is an unenforceable penalty if the value of the property forfeited under the provision bears no reasonable relationship to the range of harm anticipated to be caused if the provision is not satisfied. In this case, the Court held that there was no reasonable relationship between $0 of anticipated harm due to Mervyn's not being open and the forfeiture of $39,500 per month rent. Ross failed to show what harm would arise in the event that Mervyn's was not a co-tenant. Because Ross did not show what damages they anticipated, the Court concluded that the rent abatement provision was an unenforceable penalty. On that basis the Court awarded the landlord the amount of the unpaid rent.

The lesson to be learned from this particular case is that if you are the landlord, you should consider whether to allow such a co-tenancy agreement at all. If you are a tenant and want to enter into a lease conditioned on a co-tenancy, make sure that you can prove a reasonable relationship between the value of the property being forfeited and the range of harm to be caused if the provision is not satisfied.

Roland Amundsen is an Associate with Kring & Chung, LLP's Irvine, CA office. He can be reached at (949) 261-7700 or amundsen@kringandchung.com.

No Comments

Leave a comment
Comment Information
Premium Av Preeminent 5.0 out 5 Rating Peer Review Rated LexisNexis Martindale Hubbell Avvo Super Lawyers OC Metro Register
Contact

How Can We Help You?

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

close

Privacy Policy

Office Locations

Irvine Office
38 Corporate Park
Irvine, CA 92606

Phone: 949-345-1621
Fax: 949-261-8800
Irvine Law Office Map

Los Angeles Office
3435 Wilshire Blvd., Suite 2700
Los Angeles, CA 90010

Phone: 949-345-1621
Phone: 213-232-1633
Map & Directions

Temecula Office
41955 Fourth St., Suite 315
Temecula, CA 92590

Phone: 949-345-1621
Phone: 951-331-4520
Fax: 951-257-0450
Map & Directions

Sacramento Office
2620 J Street #1
Sacramento, CA 95816

Phone: 949-345-1621
Phone: 916-266-9000
Fax: 916-266-9001
Map & Directions

San Diego Office
11682 El Camino Real, Suite 100
San Diego, CA 92130

Phone: 949-345-1621
Phone: 858-436-0268
Fax: 858-436-0279
Map & Directions

Las Vegas Office
1050 Indigo Dr., Suite 200
Las Vegas, NV 89145

Phone: 949-345-1621
Phone: 702-260-9500
Fax: 702-260-9434
Map & Directions