Appeals Court Rules on Enforceability of Co-Tenancy Provisions in Commercial LeasesIn the first ruling by a California appellate court on the enforceability of co-tenancy provisions in commercial leases, the Fifth Appellate Court recently found that whether or not co-tenancy provisions are unconscionable or an unreasonable penalty is dependent on the negotiating experience and sophistication of the parties.

In Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc., et al, plaintiff landlord negotiated a lease with Ross Dress for Less for retail space at Porterville Marketplace in Porterville, CA. A co-tenancy provision within that lease required that another retail tenant — Mervyn’s — be open and operating at the time the lease began. If this condition was not met, Ross was not required to pay rent and the landlord had one year to cure. After that time, Ross could terminate the lease.

In addition, the provision required that Grand Prospect perform certain construction work to Ross’ specifications by the time the lease took effect in early 2009. That work was completed by the landlord in July 2008. Shortly thereafter, Mervyn’s filed bankruptcy and closed its Porterville Marketplace store in December 2008. Ross then failed to take possession and did not open its store. Per the co-tenancy provision, Ross failed to pay rent and terminated the lease in 2010 at the end of the landlord’s cure period.

Grand Prospect filed suit, alleging that the co-tenancy provisions were unenforceable and requested damages for unpaid rent, future rent and reimbursement of expenses for the construction work. A trial court found for Grand Prospect and struck the co-tenancy provisions from the lease. The jury awarded Grand Prospect damages of more than $4.7 million.

On appeal, the Fifth Appellate Court partially overturned the trial court’s ruling, finding that the co-tenancy provisions were not unconscionable since both parties were experienced and sophisticated negotiators and there were no facts demonstrating that Grand Prospect was under any undue stress or economic pressure to agree to less-than-favorable terms.

In addition, the court found that the termination provision was enforceable against Grand Prospect since it did not cause a forfeiture. However, the court did find that the rent abatement provision was an invalid penalty against Grand Prospect since the landlord lost its right to possess the property and to the rent on the parcel, while Ross suffered no economic harm due to the failure of the co-tenancy provisions.

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