The COVID-19 virus has effectively changed the business landscape of our country within just a few months. No current federal legislation impacts or affects commercial leases, leaving landlords and tenants with more questions than answers as many businesses shutter their doors. During this time, what can retail landlords do whose tenants have co-tenancy provisions within their leases?
Understanding Co-Tenancy Rights
A co-tenancy provision obligates a landlord to keep a specific percentage of open and/or operating space within a shopping center, mall, or retail area as well as require that the anchor tenants continue retail operations during a specific period of time. If stores close for two months or less, it is rare that a tenant will have any remedies under a co-tenancy provision. However, these cases may trigger the ability for a tenant to obtain reduced rent. As the COVID-19 pandemic continues, many retail stores still have their doors shuttered, or have decided to file for bankruptcy or go out of business completely. Therefore, very soon (if not already) some tenants will have the legal right under their lease to request any co-tenancy rights available to them. It is important to note that sometimes tenants must wait a year before they have the legal right to actually terminate a lease under their lease’s co-tenancy clause. Every lease will be different and have different legal provisions within it, and should be examined carefully to understand the rights of both the landlord and the tenant and their respective potential for leverage and risk exposure.
Enforcement of Co-Tenancy Provisions
If the global pandemic lasts long enough Tenant’s co-tenancy rights will likely become enforceable. In fact, many states have already found that co-tenancy clauses are enforceable under the principles of general contract law. As long as two parties mutually agree to the provisions of a contract in an arm’s length transaction, a lease agreement that includes co-tenancy provisions, will likely be enforceable by the court.
Possible Exception to Enforcement of Co-Tenancy Provisions
Landlords may find relief from one ruling by the California appellate court in the case of Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc. This case examined the co-tenancy provision of a lease contract in which the remedy requested by a tenant does not have any reasonable relationship to the actual harm suffered by a tenant. More plainly, the punishment did not fit the crime. The tenant’s lease stated that a tenant would receive complete and total rent abatement for an entire year with the ability to terminate the lease after one year if the landlord failed to meet the co-tenancy requirement for the opening day of the shopping center. The court found this consequence too harsh, and determined that the enforcement of the co-tenancy provisions, in this case, was not a remedy of the tenant. Regarding the current day COVID-19 global pandemic, landlords may look closely at this particular case to see if there is a way it can apply to their particular set of facts and circumstances. The California court approach likely differs from New York courts. In New York, general contract law interpretation principles apply, and New York courts are likely to enforce co-tenancy clauses as written. Tenants will not easily be found to have waived their rights under these clauses. In California, while a co-tenancy clause is likely enforceable, the validity of co-tenancy clauses depends on the facts and circumstances, and they are neither per se reasonable nor unreasonable. Courts will give effect to the intentions of the parties, unless the contract is substantively or procedurally unconscionable, or suffers from another such major defect. If a co-tenancy clause grants a remedy of rent abatement to the tenant, that remedy must bear a reasonable relationship to the harm that the tenant suffers from the failure of co-tenancy – for example, the reduced rent may be calculated as a percentage of sales. If not reasonably related to the harm suffered, the rent abatement amounts to an unenforceable penalty.
Force Majeure
Following the SARS epidemic in 2003, many lease agreements that include provisions regarding force majeure (“Act of God”) include viruses as a natural disaster that would allow a renter to receive relief from paying rent during times of crisis, or would trigger the co-tenancy provisions of a lease agreement. Not every agreement contains a force majeure clause, but many that do will include a section specifically addressing co-tenancy rights. If the co-tenancy provision specifically carves out store closures due to force majeure from the landlord’s co-tenancy obligations, then the tenant’s rights under the co-tenancy clause would not be triggered. If there is no provision at all regarding the intersection between force majeure and co-tenancy, then it is unlikely that a court would impute this provision into a contract. Unfortunately, at this point, it is simply impossible to predict how courts would treat these provisions with respect to the current COVID-19 virus and global pandemic.
Expectations and Predictions
No one actually knows how long this COVID-19 pandemic will impact the economy in the United States, and what that impact will actually be over time. Many retailers will choose to remain shuttered, while others may open as local and state governments offer the opportunity to do so. In any of these cases, every retailer will have a different take on how to address the co-tenancy provisions in their leases. Additionally, no one knows how the courts will handle these clauses in light of unprecedented events. A court may say that the value of a retailer diminishes substantially without co-tenants in such circumstances, thus allowing a retailer to invoke their rights under co-tenancy provisions, and other courts as in Grand Prospect Partners, may say that the remedy set out in a retailer’s co-tenancy clause bears no reasonable relationship to the harms caused by mall closures due to COVID-19 or that there is only a negligible impact to a retailer given the unique circumstances that the world finds itself currently in.
Contact an Experienced Business Attorney
Please contact us if you would like to discuss your commercial lease with respect to co-tenancy rights. You may contact Itai Klein at (310) 295-2261 or fill out our online form today. We would welcome the opportunity to help you understand your legal rights.
