Page 1
Court of Appeal:
Lowering-of-Rent Provision Wasn’t Unenforceable Penalty
Third District Declines to Follow Contrary Fifth District Decision
By a MetNews Staff Writer
The Third District Court of Appeal yesterday declared valid a clause in a lease under which a tenant would pay reduced rent if 60 percent of the space in a shopping center was unoccupied, repudiating a 2015 decision by the Fifth District declaring such a provision to be an unenforceable penalty.
Yesterday’s opinion was authored by Justice Laurie M. Earl. It upholds a summary judgment awarded by Sacramento Superior Court Judge Shama H. Mesiwala in favor of Jo-Ann Stores, LLC, a retailer of fabrics.
Under its lease with JJD-HOV Elk Grove, LLC, it was entitled to pay a lower “substitute rent” if other space was not occupied—a provision it invoked in 2018 after two “anchor tenants”—Sports Chalet and Toys R Us—closed.
But that clause, JJD proclaimed, is invalid, in light of the Jan. 12, 2015 decision in Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc. There, a damage award of more than $3.7 million was affirmed based on the refusal of the discount department store chain to open its store in a shopping center or to pay rent based on the failure of a condition precedent that space that had been utilized by a Mervyn store be occupied.
Franson’s Decision
Justice Donald R. Franson Jr. wrote in Grand Prospect:
“Here, the trial court’s determination that the rent abatement provision constituted an unreasonable penalty is supported by its findings of fact that (l) Ross did not anticipate it would suffer any damages from Mervyn’s not being open on the lease’s commencement date and (2) the value of rent forfeited under the provision was approximately $39,500 per month. There is no reasonable relationship between $o of anticipated harm and the forfeiture of 839,500 in rent per month and, therefore, the trial court correctly concluded the rent abatement provision was an unenforceable penalty.”
He specified: “This opinion does not establish a categorical rule of law holding cotenancy provisions always, or never, are enforceable. Instead, it illustrates that the determination whether a cotenancy provision is unconscionable or an unreasonable penalty depends heavily on the facts proven in a particular case.”
Raphael’s Opinion
“[W]e decline to follow the rale announced in Grand Prospect here,” Earl said in yesterday’s decision, “and instead hold that this case is governed by the general rale that courts enforce contracts as written.” She quoted a treatise on real property as explaining that a tenant in a shopping center is apt to enjoy a higher level of trade if other space is occupied, drawing customers.
A provision that a tenant is to pay one sum if anchor tenants are in operation and a lower sum if they are not entails no penalty, the jurist declared.
Although the opinion in Grand Prospect does not mention Civil Code §1671, Earl discerned an underlying supposition in the opinion that the section is applicable. It says that “a provision in a contract liquidating the damages for the breach of the contract is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.”
That section, she pointed out, applies to breaches, and the fact that Sports Chalet and Toys R Us closed did not entail a breach by JJD.
Earl wrote:
“We decline to follow the rule announced in Grand Prospect that a co-tenancy provision reducing rent if a specified condition occurs (e.g., if an anchor tenant is not open or if occupancy drops below a certain level) is an unenforceable penalty unless the reduction has a reasonable relationship to the harm the parties anticipated would be caused thereby. We do so because the rule is based on Civil Code section 1671, a statute governing the enforceability of contract provisions liquidating damages for breach of contract, and we find that statute to be inapplicable to the facts of this case because there is no suggestion that reduced occupancy in the shopping center resulted in JJD’s breach of the parties’ agreement.”
The Fifth District’s opinion approved of the trial court’s application of Civil Code §3275 which provides:
“Whenever, by the terms of an obligation, a party thereto incurs a forfeiture, or a loss in the nature of a forfeiture, by reason of his failure to comply with its provisions, he may be relieved therefrom, upon making full compensation to the other party, except in case of a grossly negligent, willful, or fraudulent breach of duty.”
The Third District jurist said:
“It thus appears the Grand Prospect court equated an unenforceable penalty with a forfeiture within the meaning of Civil Code section 3275. Based on the record before us, we decline to do the same.”
Earl embraced the proposition set forth by Jo-Ann: that “the parties’ contractual intent when reduced to writing should be controlling and enforced, particularly as applied to the commercial leasing market in arms-length negotiations and transactions.”
She added:
“In this case, we find that the parties considered and agreed to allocate the risk of reduced occupancy to JJD, and agreed JJD would receive substantially reduced rent if that risk occurred. JJD has received precisely the Substitute Rent it agreed to receive, and we find no basis for relieving JJD from the burden of its agreement.”
The case is JJD-HOV Elk Grove v. Jo-Ann Stores, 2022 S.O.S. 2795.
Copyright 2022, Metropolitan News Company