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Recent decision limits remedies for breaches of retail lease cotenancy clauses

February 25, 2015 by Daniel S. Gonzales Leave a Comment

retail-buildingOne of the most desirable and heavily negotiated terms sought by retail tenants from mall and shopping center landlords is the cotenancy clause. In a typical cotenancy clause, the tenant may have the right to delay opening its business, the right not to pay full rent, and even the right to terminate the lease, in the event an anchor tenant leaves the center, a certain amount of space becomes vacant, or a certain number of other tenants close their businesses.

The cotenancy clause

Recently, a California Court of Appeal has held that a retail tenant’s remedy of rent abatement for a shopping center landlord’s breach of the lease’s cotenancy clause, caused by the bankruptcy and closure of another major retailer in the center, constituted an unenforceable penalty and forfeiture. The court reached this conclusion based on the fact that the tenant seeking to enforce its remedy failed to show that the rent reduction bore a reasonable relationship to the harm it suffered.  It is recommended that tenants whose leases contain such rent abatement provisions in their cotenancy clauses should have those terms reviewed with an eye towards avoiding this result.

Specific to the facts of this particular case,

It is worth noting that the court in this case emphasized that its ruling was specific to the facts of this particular case, leaving open the possibility for a different outcome if, for instance, it could be proven that the tenant had anticipated harm from the failure of the cotenancy condition, or if the landlord owned the property of the other tenant and thus had the ability to cure the breach of the cotenancy provision.

Filed Under: commercial leases, cotenancy clauses, retail lease

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Mr. Gonzales is in private practice, providing representation, advice and counsel in complex real estate, corporate, and business transactions on behalf of public and private institutions, businesses, and individuals.

This material has been prepared by Daniel S. Gonzales for informational purposes only and does not constitute advertising, a solicitation, or legal advice. Neither delivery nor transmission of this material or the information contained herein is intended to create, and receipt thereof does not constitute formation of, an attorney-client relationship. The reader should not rely upon this information for any purpose without seeking legal advice from a licensed attorney. The information contained in this material is provided only as general information and is not promised or guaranteed to be correct or complete. Daniel S. Gonzales expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this material.

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