Rent Abatement Was Unreasonable Penalty on Owner

July 29, 2015
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It's natural for a tenant to want every protection it can get in its lease for commercial space. But be aware that you can actually negotiate too hard for remedies in the event that your ability to operate is compromised. That's what recently happened to a clothing store retailer in a case where the penalty against the center's owner was deemed to be unreasonable.

There, the shopping center owner sued the tenant, challenging the enforceability of lease provisions conditioning the tenant's obligation to open a store and pay rent on a specific retailer operating a store in the center on the commencement date of the lease. The opening cotenancy condition was not satisfied. The tenant took possession of the space, never opened for business, never paid rent, and terminated the lease after the 12-month cure period expired.

The owner claimed that the tenant was obligated to pay rent for the full 10-year term of the lease because the provisions authorizing rent abatement and termination were unconscionable or, alternatively, an unreasonable penalty and thus unenforceable. The trial court agreed. A jury awarded the owner $672,100 for unpaid rent and approximately $3.1 million in other damages caused by the termination.

The tenant appealed, contending that the cotenancy provisions in the lease were not procedurally and substantively unconscionable and were not an unreasonable penalty. Ultimately, a California appeals court modified the decision to award damages for unpaid rent; it upheld the rest of the decision as modified.

The appeals court concluded that there was no unconscionability because the parties were sophisticated and experienced in commercial lease negotiation. However, it also stated that as a general rule, a contractual provision is an unenforceable penalty under California law 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.”

Here, the trial court's determination that the rent abatement provision constituted an unreasonable penalty was supported by its findings that: (1) the tenant did not anticipate it would suffer any damages from the retailer not being open on the lease's commencement date; and (2) the value of rent forfeited under the provision was approximately $39,500 per month. There was no reasonable relationship between $0 of anticipated harm and the forfeiture of $39,500 in rent per month, and therefore, the rent abatement provision was an unenforceable penalty, the appeals court determined [Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc., January 2015].