JJD-HOV Elk Grove LLC v. Jo-Ann Stores, LLC

JJD-HOV Elk Grove LLC (JJD) (plaintiff) leased space in a shopping center to Jo-Ann Stores, LLC (Jo-Ann) (defendant). The lease included two rent clauses, one requiring Jo-Ann to pay a fixed minimum monthly rent of $36,458 and another providing for substitute rent of $12,000 or 3.5 percent of Jo-Ann’s sales, whichever was greater. Substitute rent applied if the lease’s cotenancy provision was not satisfied. That provision required JJD to maintain shopping-center leases (1) with three anchor tenants or (2) covering 60 percent of the center’s leasable space. If the cotenancy provision was not satisfied for six months, Jo-Ann could terminate the lease or continue tenancy paying only substitute rent. Jo-Ann invoked the substitute-rent clause in 2004 while waiting for the anchor tenants to open and again in 2007 after an anchor tenant closed. Jo-Ann invoked the clause a third time beginning in 2018, when two anchor tenants closed and reduced retail occupancy below 60 percent. Based on a recent California Court of Appeal case that had declared a cotenancy provision to be an unenforceable liquidated-damages penalty, JJD sued Jo-Ann seeking a declaratory judgment that the parties’ cotenancy provision was an unenforceable penalty and Jo-Ann had therefore owed fixed minimum rent for the entire lease. JJD sought $638,293 in back rent. The trial court granted summary judgment in Jo-Ann’s favor, concluding that the parties’ cotenancy provision was an alternative means of contractual performance, not a penalty. The court of appeal affirmed, and the California Supreme Court granted review.