California Court of Appeal Ends Silence on Enforceability of Co-Tenancy Provisions in Commercial Leases Posted on May 16, 2015 in Real Estate Law

By Jon K. Ladd

Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc., et al. (2015)

Ross Dress for Less leased space in a shopping center near Mervyn’s. The Ross lease contained a co-tenancy clause allowing Ross to terminate its lease if Mervyn’s closed and the landlord could not find a suitable replacement tenant within 12 months of Mervyn’s termination (during which time Ross would get full rent abatement). When the landlord failed to find a suitable replacement tenant within the 12-month period, Ross terminated its lease. The landlord sued claiming in excess of $4.7 million dollars. Ross appealed relying on its right to terminate its lease pursuant to the co-tenancy provision.

The Ross court found that co-tenancy provisions are not enforceable, per se. Enforceability depends upon a balancing of factors, which include the “Sophistication” of the parties, whether one party or the other was under some sort of “Time Pressure,” whether one party was under “Economic Pressure,” whether one party or the other felt pressured by “Coercion or Threats,” whether the “Relative Bargaining Power of the Parties” was reasonably equal, and finally, whether the parties each had “Meaningful Choices” to pursue if negotiations with the other were unsuccessful. Balancing these factors, the appellate court held that the landlord did not demonstrate grounds for invalidating the co-tenancy provision and therefore, Ross’ exercise of its right to terminate pursuant to its co-tenancy provision was upheld.

The outcome of this case is much less important than the balancing test created by the Courts in Co-tenancy dispute cases. This ruling is deeply concerning, since a tenant who negotiates a co-tenancy provision in good faith with a landlord has no assurance it will be able to rely on that co-tenancy provision if needed in the future. The Ross Court has left the door wide open, and it will no doubt take more than one case to further define the balancing factors the Ross Court has established. So much for the sanctity of contracts.

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