CO-TENANCY CLAUSES – ARE THEY ENFORCEABLE? (June 2025)

In a recent case, JJD-HOV Elk Grove LLC v. Jo-Ann Stores, LLC, the California Supreme Court validated certain co-tenancy provisions in commercial leases.  Co-tenancy provisions are typically found in retail leases and allow the tenant to pay reduced rent or terminate the lease when an anchor tenant leaves or the overall occupancy level in the center gets too low.  The issue with co-tenancy clauses is whether they constitute valid alternative-performance provisions or liquidated damages provisions that are subject to reasonability limitations.  The Supreme court found the co-tenancy clause in that case to be a valid alternate-performance provision because it gave the landlord the option of choosing either to provide a higher level of service (i.e., a center with anchor tenants or specified occupancy levels) and receive a higher rent or, alternatively, to provide a reduced level of service (i.e., a center with reduced anchor tenants or occupancy levels) and receive a reduced rent.  Although the co-tenancy clause is triggered by a third party over whom the landlord has no control (i.e., the anchor or other tenants who leave the center), the landlord maintains some level of control over the center’s occupancy rates.  For example, the landlord may offer incentives to potential tenants to move into or not abandon available spaces.  A different result could be reached if the landlord does not have sufficient control to choose whether or not the co-tenancy clause is activated.