Loss of Shopping Center Tenant Triggers Co-Tenancy Rent Cut

 What Happened:  A shopping center lease contained a co-tenancy clause giving a tenant a reduced rent if occupancy by major retail tenants fell below 70 percent. The bankruptcy of a grocery store tenant occupying 63,000 square feet triggered the clause. But when the tenant notified the owner of its intent to pay the reduced rent, the owner asked a court to proclaim that the co-tenancy clause was unenforceable. The owner argued that the co-tenancy rent cut would be a form of liquidated damages. And liquidated damages aren’t enforceable when they amount to a penalty as the rent cut would. 

Decision: The federal court in Nevada nixed the owner’s argument and said the clause is enforceable.

Reasoning: Liquidated damages are an agreed-to estimate of what the damages will be if a breach occurs, the court explained. But that’s not what the co-tenancy clause in this case was all about. The clause wasn’t designed to deal with a breach but to establish a fair rental amount based on the mutual understanding that the value of the leased space would be less if the conditions set out in the co-tenancy clause came to pass—that is, if the square footage leased by major retail tenants at the shopping center dipped below 70 percent. 

• Boca Park Marketplace Syndications Grp., LLC v. Ross Dress for Less, Inc.: 2019 U.S. Dist. LEXIS 103985, 2019 WL 2563814