Facts: A retail tenant and a landlord negotiate and enter into an agreement to lease a commercial space within a shopping complex. The tenant’s agreement to take possession and pay rent is contingent upon the operation of another retailer in the same complex at the commencement of the lease term. The lease terms agreed to also include the tenant’s option to terminate the lease if the other retailer ceases operation in the shopping complex and a suitable replacement is not found within 12 months, subject to the tenant’s approval and provided the tenant gives a 30-day notice of termination. Before the commencement date of the lease, the other retailer named in the co-tenancy provision goes out of business. The tenant takes possession of the premises but does not open a store or pay rent. The landlord finds a replacement retailer for the space vacated by the other retailer, but the replacement retailer is not ready to occupy the space within 12 months of the commencement of the tenant’s lease. 12 months after commencement, the tenant gives the landlord 30 days’ notice of termination of the lease.
Claim: The landlord seeks back rent for the duration of the tenant’s possession of the premises, claiming the provision for rent abatement in the event of unmet contingencies is an unreasonable penalty since the amount of rent withheld bears no relation to actual money losses incurred by the tenant as they never began operations on the premises.
Counterclaim: The tenant seeks to terminate the lease without the payment of back rent, claiming it is entitled to withhold rent until the option to terminate the lease becomes available since the tenant would lose profits in the absence of the other retailer and thus the rent abatement does not constitute an unreasonable penalty.
Holding: A California Court of Appeals holds that the landlord is entitled to back rent for the duration of the tenant’s possession of the premises since the amount of rent withheld bears no relation to any losses incurred by the tenant due to the co-tenancy contingency and therefore constitutes an unreasonable and unenforceable penalty. [Grand Prospect Partners, LP vs. Ross Dress for Less, Inc. (2015) 232 CA4th 1332]
Also at issue in this case:
Is the termination of a commercial lease unconscionable when neither party breaches the agreement?
Facts: A large national retail tenant and an experienced commercial landlord negotiate and enter into a 10-year agreement to lease a commercial space within a shopping complex. The tenant’s agreement to take possession and pay rent is contingent upon the operation of another retailer in the same complex at the time of the commencement of the lease. The lease terms agreed to also include the tenant’s option to terminate the lease if the other retailer ceases operation in the shopping complex and a suitable replacement is not found within 12 months, subject to the tenant’s approval and provided the tenant gives a 30-day notice of termination. Before the commencement date of the lease, the other retailer named in the co-tenancy provision goes out of business. 12 months after the commencement of the lease, the tenant gives the landlord 30 days’ notice of termination of the lease.
Claim: The landlord seeks to enforce the terms of the lease, claiming the provision enabling the tenant to terminate the lease is unconscionable and constitutes a forfeiture since the landlord has no control over whether the other retailer continues to operate or goes out of business.
Counterclaim: The tenant seeks to terminate the lease and return possession of the premises, claiming the termination of the lease was neither unconscionable nor a forfeiture since the clause terminating the lease upon the occurrence of contingencies was agreed to by sophisticated parties and was not triggered by a default of either party.
Holding: A California Court of Appeals holds that the tenant’s exercise of the termination clause stemming from the co-tenancy contingency is not unconscionable since both the landlord and the tenant were sophisticated parties and does not constitute a forfeiture on the landlord’s part arising from the tenant’s exercise of the termination clause. [Grand Prospect Partners, LP vs. Ross Dress for Less, Inc. (2015) 232 CA4th 1332]
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