A recent California decision addressed lease remedies available to a tenant for a violation by a
landlord of a co-tenancy provision in a retail lease. The Court’s analysis in that case can be applied to other lease provisions, which could trigger a setoff right or a right to pay reduced rent, such as in connection with a violation of a use restriction.
In Grand Prospect Partners, L.P. vs. Ross Dress for Less, Inc., 232 Cal. App. 4th 1332 (5th
Dist. 2015), the Court held that a co-tenancy provision in a retail lease that permitted Ross as tenant to accept possession of its leased premises but thereafter not pay rent or be obligated to open for business was unenforceable. The Court did, however, uphold the action of Ross in terminating the lease
after the co-tenancy provision remained unsatisfied for the required 12-month period.
In this case, the co-tenancy provision conditioned the tenant’s obligation to both open its store and pay rent on the continued operation of a specific tenant in the shopping center. The Court paid specific
attention to the fact that the landlord in this case did not have a lease provision that entitled the landlord to replace the specific tenant in the co-tenancy provision with a tenant of similar size and stature. Obviously, from a drafting point of view, such a provision should be included in all leases involving
co-tenancy provisions. Also, the provision should carefully define the type of replacement tenant that would satisfy the provision, as well as obtain relief from the requirement that 100% of the space occupied by the required co-tenant must be leased and re-opened for business.
Although the Court refused to hold that the co-tenancy provision itself including the right to terminate was unconscionable, the Court did find that it was an unreasonable penalty for a tenant to be able to move into space and then not pay rent. As a result, although the Court upheld Ross’s termination of the lease, the Court held that the rent abatement provision was an unreasonable penalty and therefore unenforceable. The Court concluded that a contractual provision is an unenforceable penalty “if the value of the money or property forfeited or transferred to the party protected by the provision bears
no reasonable relationship to the range of harm anticipated to be caused to that party by the failure of the provision’s requirements.”
The logic of the Court’s decision can be applied to the action of a tenant in paying reduced rent as a result of the violation of a use restriction in a lease. A tenant could bolster its position if the lease
includes language that the rent abatement constitutes liquidated damages and not a penalty and that such liquidated damages constitute a reasonable estimate of the damages that may be incurred that are otherwise not readily ascertainable. A landlord, on the other hand, can attempt to argue that rent
abatement in the context of the violation of a use restriction is an unreasonable penalty.
Grand Prospect is important because it contains a helpful analysis of issues that often arise in
a retail lease transaction. It also provides a framework for a landlord to potentially combat a retail tenant’s unreasonable use of rent abatement, particularly in the context of the violation of a use restriction or other provisions where the “punishment might not fit the crime.”