Commercial leaseIf you are a Ross store, and you are on one end of a shopping center, and Mervyn’s is down at the other end, can you bail out if Mervyn’s does? After all, you count on the people-traffic Mervyn’s brings into the center. And you even have a “co-tenancy” provision in your lease that says you can. Or does it?

A recent court decision shed light on the subject. The answer might surprise you…

In a recent decision Grand Partners, L.P. v. Ross Dress for Less, Inc., et al., 182 Cal.Rptr.3d 235 (2015), a California Court of Appeal ruled for the first time on the enforceability and applicability of co-tenancy provisions in a commercial lease.

In a “thanks for nothing” opinion, the Court determined that the enforceability of a co-tenancy provision must be made on a case-by-case basis.

In a split-the-baby decision, the Court, on the one hand found that the lease provision giving Ross the right to a rent abatement in the absence of an anchor store was “an unenforceable penalty” because the landlord didn’t own the space that Mervyn’s was occupying, and had no control over whether it would be leased or not. However, the Court also determined that the provision allowing Ross to terminate the lease after twelve months had passed without an anchor store (Mervyn’s) opening was not an unenforceable penalty or forfeiture. Thus, while the landlord was entitled to recover the amount of rent due and owing for the period in which Ross had possession of the premises (the 12 months), it was not entitled to recover additional damages stemming from the “early” termination of the lease.

The take away?

A co-tenancy requirement in a center where ALL the spaces are owned by a single landlord is enforceable, where a center with separately owned “pads” can not have an enforceable co-tenancy requirement.

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