Co-Tenancy Provisions in California Retail Leases

May 2025

By J.J. Sherman, Law Offices of J.J. Sherman, P.C. and Tanjim Haque, St. John’s University School of Law

A co-tenancy provision is a tenant-friendly clause found in commercial real estate leases for multi-tenant centers. It may allow a tenant to delay its initial opening, to terminate its lease or to pay reduced rent if either specific named tenants or a minimum percentage of tenants are not open and operating in the center. Here, we explore the rationales for including co-tenancy provisions in leases and discuss recent caselaw addressing co-tenancy provisions.[1]

Why Would a Tenant request a Co-Tenancy Provision?

There are several key reasons why tenants may seek to include a co-tenancy provision in their leases. The primary motivation is often the desire to increase foot traffic to their business. One of the most common rationales is that smaller retailers seek the presence of larger anchor tenants, whose established customer bases may drive significant traffic to the center, and thus to other smaller retailers.

Another important reason is the strategic placement of complementary tenants. For example, a retailer who sells apparel primarily to teenagers may prefer to be located next to another retailer who sells different apparel, also to teenagers. The proximity to complementary brands can make the center a desirable shopping destination that attracts a shared customer base, thereby benefiting all involved.

Additionally, tenants may seek co-tenancy provisions to avoid being one of the few businesses operating in a largely vacant center. When a center has high vacancy rates, customers are less likely to visit, as the shopping experience may feel less appealing in what is often referred to as a “dead mall.” The lack of other open stores diminishes the potential benefits for operating tenants, who rely on the liveliness of the center to generate traffic and sales.

A Key Case for Drafting: JJD-HOV Elk Grove LLC v. Jo-Ann Stores, LLC

In December 2024, the California Supreme Court released its decision in JJD-HOV Elk Grove LLC v. Jo-Ann Stores, LLC,[2] addressing co-tenancy provisions in commercial leases. To fully grasp the significance of this decision, it is crucial to first examine the 2015 ruling in Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc.[3]

In Grand Prospect Partners, the court “d[id] not establish a categorical rule of law holding co-tenancy provisions always, or never . . . enforceable.” Instead, the court wrote that “the determination [of] whether a co-tenancy provision is unconscionable or an unreasonable penalty depends heavily on the facts of a particular case.”[4] Grand Prospect Partners, L.P., as landlord, and Ross Dress for Less, Inc., as tenant, signed a lease which “conditioned Ross’s obligation to open a store and pay rent on [another store,] Mervyn’s operati[on] . . .  in the shopping center on the commencement date of the lease . . . .” The lease “also granted Ross the option to terminate the lease if Mervyn’s ceased operations and was not replaced by an acceptable retailer within 12 months.”[5] The court noted that “[t]he opening co-tenancy condition was not satisfied because Mervyn’s filed for bankruptcy and closed its store. . . Ross never opened for business, never paid rent, and terminated the lease after the 12-month cure period [under the lease] expired.”[6] Under California law, “a contractual provision is an unenforceable penalty . . . if the value of the property forfeited under the provision bears no reasonable relationship to the range of harm anticipated to be caused if the provision is not satisfied.”[7]

In Grand Prospect Partners, the Court of Appeal for the Fifth District upheld the lower court’s decision that the rent abatement provision constituted an unreasonable penalty because “(1) Ross did not anticipate that it would suffer . . . damages from Mervyn’s not being open on the lease’s commencement date” and (2) the value of the rent forfeited by the landlord (approximately $39,500 per month) did not bear a reasonable relationship to the range of anticipated harm to tenant (approximately $0).[8] The appellate court concluded that the termination provision did not create an unreasonable penalty, since the termination provision did not constitute a forfeiture.[9] “California courts have adopted a specific rule that holds no forfeiture results from terminating a commercial lease based upon the occurrence of contingencies that (1) are agreed upon by sophisticated parties and (2) have no relation to any act or default of the parties.”[10] The appellate court held the portion of the co-tenancy provision that allowed Ross to terminate its lease was enforceable, but the portion that allowed Ross not to pay rent was an unenforceable penalty.

More recently, the California Supreme Court in JJD-HOV Elk Grove discussed potential situations in which a co-tenancy provision will be interpreted not as an unreasonable penalty, but as a valid contractual agreement for alternative performance.[11]  JJD-HOV Elk Grove LLC, as landlord, and Jo-Ann Stores, LLC, as tenant, entered into a lease that included a co-tenancy provision which stated that “[i]f the co-tenancy provision is not satisfied for a period of six months, Jo-Ann has the option to” pay, as an alternative to the much higher Fixed Minimum Rent, a “Substitute Rent” equal to the greater of 3.5% of gross sales or $12,000 per month until the satisfaction of the co-tenancy provision,[12] or to terminate the lease. When the co-tenancy provision was not satisfied, Jo-Ann paid the “Substitute Rent” and JJD-HOV sued for the Fixed Minimum Rent, arguing the co-tenancy provision constituted an unenforceable penalty. The California Supreme Court agreed with the Court of Appeals’ decision that the lease and co-tenancy provision “created a rent scheme in which there are two applicable rents.”[13] “[T]he triggering of the co-tenancy provision and Jo-Ann’s subsequent payment of Substitute Rent was an alternative form of compliance with the lease as explicitly spelled out in lease terms . . . .”[14]

The California Supreme Court disagreed with JJD-HOV’s position, emphasizing that the terms of the lease should be honored as written. The court reasoned that both parties were sophisticated commercial entities, each represented by counsel and given ample opportunity to negotiate freely and without undue pressure. Accordingly, the court viewed the provision as a valid contractual arrangement designed to allocate risks between the parties through two alternative rent structures. Importantly, the court further clarified that a contractual provision that might appear to function as a penalty is not necessarily unenforceable if it represents an agreed-upon alternative performance.

Drafting Lessons from Grand Prospect Partners and JJD-HOV Elk Grove

After Grand Prospect Partners and JJD-HOV Elk Grove, we know that co-tenancy provisions providing for rent abatement may be invalid as an “unenforceable penalty” if the value of the rent forfeited by the Landlord bears no reasonable relationship to the range of loss anticipated by the tenant. The co-tenancy provision must reflect a genuine attempt to estimate in advance the possible losses resulting from a breach, rather than simply serving as a punitive measure.

Co-tenancy provisions providing for a rent scheme in which there are two alternative rents, one where the co-tenancy provision is met and one where the co-tenancy provision is not, are likely to be valid as an “alternative rent structure,” if the lease is an arms-length transaction negotiated by sophisticated parties.

Lastly, co-tenancy provisions permitting the tenant to terminate the lease are likely to be valid if the provisions are agreed upon by sophisticated parties and the right to terminate has no relation to any act or default of the parties.

For practitioners considering the use of co-tenancy provisions for retail clients, both Grand Prospect Partners and JJD-HOV Elk Grove provide much needed guidance on drafting co-tenancy provisions that are more likely to be enforceable and preserve clients’ business goals.

For more information on this or other commercial real estate law topics, visit the website for Law Offices of J.J. Sherman, P.C.

This communication is for informational purposes only. It is not intended to create an attorney-client relationship or constitute an advertisement, a solicitation, or professional advice as to any particular situation. If this communication is considered advertising, then it is herewith identified as such. This communication does not constitute a guarantee, warranty or prediction regarding the result of representation. Prior results do not guarantee a similar outcome.

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[1] Special thanks to Erinn N. Lew, St. John’s University School of Law, who provided invaluable input while preparing this article.

[2] JJD-HOV Elk Grove, LLC v. Jo-Ann Stores, LLC, 560 P.3d 297, 298 (Cal. 2024).

[3] Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc., 182 Cal. Rptr. 3d. 235, 239-40 (Cal. Ct. App. 2015).

[4] Id. at 240.

[5] Id.

[6] Id.

[7] Id.

[8] Id. at 240-41.

[9] Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc., 182 Cal. Rptr. 3d. 235, 241 (Cal. Ct. App. 2015).

[10] Id.

[11] JJD-HOV Elk Grove, LLC v. Jo-Ann Stores, LLC, 560 P.3d 297, 298-99 (Cal. 2024).

[12] Id. at 300.

[13] Id. at 301-02.

[14] Id.