In June 2003, JJD-HOV Elk Grove
leased space to Jo-Ann Stores, consisting of 35,000 SF in a commercial shopping
center. The initial term was 10 years, with four options to extend of five
Base monthly rent started at $36,548 per month, increasing every five years. At the time of the dispute base rental was approx. $43,000 per month.
Lease contained a co-tenancy provision obligating JJD to enter into leases with
either three anchor tenants, or otherwise maintain an occupancy level of at
least 60% of the gross leasable area of the Shopping Center. If the co-tenancy
obligation is not met, then Jo-Ann can pay only Substitute Rent until the occupancy
threshold is met. ‘Substitute Rent’ is the greater of 3.5% of Jo-Ann’s gross
sales at that location, or $12,000 per month.
if the co-tenancy burden is not satisfied for a period of six months, then Jo-Ann
could terminate the Lease.
Jo-Ann invoked the co-tenancy provision twice
before this claim. For several months in 2004 and 2005, Jo-Ann paid Substitute
Rent until all three anchors, Jo-Ann, Sports Chalet, and Sacramento Food Coop,
were open for business.
in 2007, a dispute arose over Jo-Ann’s right to pay Substitute Rent when the Coop
was replaced by Grocery Outlet.
present dispute arose in 2018 when Jo-Ann informed JJD it would start paying
Substitute Rent again because two anchors – Sports Chalet and Toys R Us – had both
closed. Sports Chalet had closed in 2016, but presumably the subsequent closure
of Toys R Us brought the shopping center’s occupancy load to below 60%.
proceeded to pay Substitute Rent until May 2020, when Scandinavian Designs opened
in the former Toys R Us space. At that time, Jo-Ann returned to paying the full
base rent provided in the Lease.
offended by its own co-tenancy clause, asserted a complaint against Jo-Ann,
claiming that the Substitute Rent provision is an unenforceable penalty and as
a consequence, Jo-Ann is obligated at all times to pay full rental, regardless
of occupancy loads and anchor tenants. JJD tabulates that Jo-Ann owes $638,293
in rent as of January 2021.
trial court ruled in favor of Jo-Ann. JJD appealed.
argument regarding an unenforceable penalty was centered around a theory of
proportionality. If there is no proportional relationship between the
forfeiture compelled and the damages that might actually flow from the failure
to perform or satisfy a condition, then the provision must fail.
unenforceable penalty bears no reasonable relationship to the range of actual
damages the parties could have anticipated when the contract was signed. How to
know? The court must compare the value of the money forfeited or property
transferred to the party protected by the condition, to the range of harm or
damages anticipated to be caused that party by the failure of that condition.
this is a close call for the appellate Court to make, the Court concludes that
the co-tenancy provision is valid and enforceable as it is neither
disproportionate nor a penalty. Jo-Ann wins again; JJD loses again.
JJD-HOV Elk Grove v. Jo-Ann Stores; Case Number C094190; California Court
of Appeals 3rd District; June 28, 2022: https://casetext.com/case/jjd-hov-elk-grove-llc-v-jo-ann-stores-llc.
* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization
Licensed in the States of Texas and New York
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
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