Saturday, July 30, 2022


            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 years each.

            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.           

            The 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.

            Also, 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.

            Then, in 2007, a dispute arose over Jo-Ann’s right to pay Substitute Rent when the Coop was replaced by Grocery Outlet.

            The 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%.

            Jo-Ann 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.

            JJD, 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.

            The trial court ruled in favor of Jo-Ann. JJD appealed.

            JJD’s 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.

            An 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.

            Although 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.

            See JJD-HOV Elk Grove v. Jo-Ann Stores; Case Number C094190; California Court of Appeals 3rd District; June 28, 2022:

                                                                                    Stuart A. Lautin, Esq.*



* 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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