Published On: February 25th, 2015 / Categories: commercial leases, cotenancy clauses, retail lease /

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.

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