Cotenancy Provision Upheld and not Deemed an Unenforceable Penalty


JJD-HOV Elk Grove v. Jo-Ann Stores, LLC (80 Cal.App.5th 409) (“JJD-HOV”)[1] highlights that a court is unlikely to intervene and insert terms in a negotiated contract even if one party receives a windfall upon the realization of the contract’s terms.  In JJD-HOV, a tenant in a shopping center, Jo-Ann Stores, had a lease with the owner, JJD-HOV Elk Grove, which provided that if a condition arose where the shopping center either had less than (i) three operating anchor tenants or (ii) 60% of the center leased, then Jo-Ann Stores would pay a stipulated lower rent until either or both conditions were resolved.  This is typically called a “cotenancy provision” and can be included in shopping center retail leases to encourage a bustling shopping center and customers on-site to shop.  Upon the occurrence of less than three operating anchor tenants, Jo-Ann Stores paid the reduced stipulated rent and JJD-HOV Elk Grove sued alleging that the cotenancy provision was an unenforceable penalty.

JJD-HOV Elk Grove relied on a prior case, Grand Prospect Partners, LP v. Ross Dress for Less, Inc. (“Grand Prospect”) in which that court of appeal distinguished the general rule that courts enforce contracts as written and held the cotenancy provision in Grand Prospect was an unenforceable penalty because of a lack of a proportional relationship between the forfeiture compelled and the damages or harm that might actually follow from the failure to perform the covenant or satisfy the condition.  In Grand Prospect, they relied on the concept of a cotenancy provision as a liquidated damages provision since they are fixing the rent ahead of time upon the condition not being fulfilled.  There, the court found that the harm to Ross (which was essentially zero dollars) was not in any way proportional to the remedy (in that case, they paid no rent upon such cotenancy condition not being satisfied), thus the liquidated damages provision was deemed a penalty and unenforceable.

Liquidated damages is a contract provision prescribing in advance the payment to one party as damages for a breach of the contract by the other party.  The damages amount should be reasonable for the applicable breach otherwise it could be deemed an unenforceable penalty.  In JJD-HOV, the court declined to find a cotenancy provision akin to a liquidated damages provision because the lease did not state that reduced occupancy in the shopping center resulted in JJD-HOV Elk Grove’s breach of the lease, only that the condition was not satisfied.  Further, unlike in Grand Prospect, this court held that the alternate rent paid should not be considered “damages”, just two different rental rates, similar to paying a higher amount when a tenant holds over in a space after the lease termination date.  Finally, the JJD-HOV court found that the parties negotiated the lease in an arms-length transaction and were hesitant to alter a negotiated contract, even if one party (in this case, Jo-Ann Stores) received a windfall when paying the lower stipulated rent.

JJD-HOV declined to follow the Grand Prospect holding that a cotenancy provision could be held unenforceable if the predetermined reduction in rent did not have a reasonable relationship to the harm the parties anticipated to be caused by the failure in condition.  Instead, the court relied on the general rule that it will not alter a contract negotiated in good faith even if one party receives a windfall because of its terms.  JJD-HOV reminds us that courts may take a more laissez-faire approach if a contract is negotiated, even if inherently unfair, unless a provision expressly violates a specific law.

[1] The JJD-HOV case is under review.  We will update if further action is taken.


Authored by Reuben, Junius & Rose, LLP Attorney Lindsay Petrone.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.