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CA Supreme Court Upholds Co-Tenancy Clause
The Supreme Court of California recently upheld the validity of the co-tenancy clause of a retail lease and its alternative rent structure in JJD-HOV Elk Grove, LLC v. Jo-Ann Stores, LLC, No. S275843, 2024 WL 5164746 (Cal. Dec. 19, 2024), determining that the landlord held the requisite control under the associated lease agreement with the co-tenant because that co-tenant was located on property owned by that landlord.
Notably, the court made a clear distinction between that scenario and the situation where a co-tenant is located on property owned by an unrelated third party.
In that case, the court left open the possibility that a co-tenancy clause could be unenforceable because the landlord does not have sufficient power or control over the terms of the associated co-tenant lease.
Co-Tenancy Clauses Explained
A co-tenancy provision is most commonly found in leases for retail properties, and is designed to protect a retailer in the event an unacceptable number of the other tenants in the shopping center close their doors. Retail tenants thrive on high traffic within shopping centers and can be harmed when that traffic drops due to the closure of other operators.
A co-tenancy provision provides a tenant with certain remedies in the event that the occupancy of a shopping center falls below predetermined thresholds. The thresholds are typically either a specified number of named or anchor tenants or a certain percentage of the gross leasable area of the shopping center.
In the event that those named tenants close, or the shopping center vacancy rate exceeds the agreed-upon percentage, the tenant under the lease would be entitled to exercise its remedies. Importantly for the case at hand, the other retailers that determine this threshold are not always tenants of the subject landlord; instead, they may occupy property owned by another landlord, but is still within one cohesive shopping center.
Generally speaking, there are two types of co-tenancy clauses: opening co-tenancy and operating (or on-going) co-tenancy. Opening co-tenancy clauses provide that a tenant will not be required to open its store or begin paying rent unless and until an occupancy threshold is met.
Opening co-tenancy clauses are commonly used in leases signed during the construction or development of a shopping center, or when an existing shopping center is undergoing a renovation or redevelopment.
On the other hand, operating co-tenancy clauses apply after a tenant initially opens in its space. In this scenario, should the shopping center fall below the agreed-upon occupancy thresholds during the term of the lease, the tenant’s remedies kick in. Remedies typically include some form of reduced rent and, potentially, a right to terminate the lease.
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