Retail leases: California's high court upholds a co-tenancy clause
In JJD-HOV Elk Grove v. Jo-Ann Stores, the California Supreme Court held that a lease term lowering a tenant's rent when a shopping center loses anchor stores is enforceable, not a penalty.
Reviewed by Laurence S. Bezinover · Published
What changed
Many retail leases include a co-tenancy clause: if key “anchor” stores close or occupancy drops below a set level, the tenant may pay reduced rent or end the lease. Landlords have argued that these terms are unenforceable penalties under Civil Code § 1671, which governs liquidated damages. In 2015, a Court of Appeal decision, Grand Prospect Partners v. Ross Dress for Less, refused to enforce one such clause on that basis.
On December 19, 2024, the California Supreme Court unanimously upheld a co-tenancy clause in Jo-Ann Stores' lease at an Elk Grove shopping center. Monthly rent had reached $42,292. If, for six months, neither the required anchor stores (or comparable replacements) were open nor at least 60% of the rest of the center was leased, Jo-Ann could terminate or pay “Substitute Rent” of the greater of 3.5% of gross sales or $12,000 a month. Jo-Ann paid the lower rent for about 20 months.
The court treated the clause as an “alternative performance” term rather than a penalty. Viewed from when the lease was signed, the landlord had a realistic and rational choice between a fuller center at full rent and a less-occupied center at lower rent, and because it owned the center and was the anchors' landlord, it could influence which one occurred. Because the clause was alternative performance, § 1671 did not apply. The court expressed no view on whether Grand Prospect was correctly decided, but distinguished it: the landlord there had no control over the anchor store, which owned its own building.
Who it affects
Owners of shopping centers and mixed-use properties, retail and restaurant tenants with co-tenancy rights, and buyers and lenders who review rent rolls. The test the court applied comes from general contract law, so it may also bear on other commercial agreements that set a lower price for a reduced level of performance.
Questions to raise with counsel
- For landlords: whether the owner controls, through ownership or leases, the anchor stores or occupancy levels a co-tenancy clause depends on.
- For tenants: whether a clause is written as a choice between two levels of performance and rent, rather than as a payment owed after a breach.
- For centers with separately owned parcels or anchors: how the Grand Prospect distinction may affect whether a clause is enforced.
- For buyers and lenders: which leases on a rent roll carry co-tenancy rights, and what rent would be payable if they were triggered.
This briefing is general information about California law, not legal advice for your situation. Reading it does not create an attorney-client relationship.