Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc.

• Decision Date: 12 January 2015
• Docket Number: F067327
• Court: California Court of Appeals Court of Appeals
• Parties: GRAND PROSPECT PARTNERS, L.P., Plaintiff, Cross-Defendant and Respondent, v. ROSS DRESS FOR LESS, INC. et al., Defendants, Cross-Complainants and Appellants.

GRAND PROSPECT PARTNERS, L.P., Plaintiff, Cross-Defendant and Respondent, v. ROSS DRESS FOR LESS, INC. et al., Defendants, Cross-Complainants and Appellants.

F067327

COURT OF APPEAL OF THE STATE OF CALIFORNIA FIFTH APPELLATE DISTRICT

January 12, 2015

CERTIFIED FOR PUBLICATION

(Super. Ct. No. VCU237296)

OPINION

APPEAL from a judgment of the Superior Court of Tulare County. Paul A. Vortmann, Judge.

Arnold & Porter, Sean M. SeLegue, Jerome B. Falk, Jr., Jeremy McLaughlin; Bartko, Zankel, Bunzel & Miller, Benjamin K. Riley, Simon R. Goodfellow; Dowling Aaron, Donald R. Fischbach and Steven M. Vartabedian for Defendants, Cross-Complainants and Appellants.

Bingham McCutchen, Stephen Zovickian and Robert A. Brundage; Caswell Bell & Hillison, Robert K. Hillison and Kimberly L. Mayhew for Plaintiff, Cross-Defendant and Respondent.

Caldwell Leslie & Proctor, Christopher G. Caldwell, Michael D. Roth and Albert Giang for California Retailers Association, The Gap, Inc., Bed Bath & Beyond Inc., H&M Hennes & Mauritz L.P., Petco Animal Supplies, Inc., and VF Outdoor, Inc. as Amicus Curiae on behalf of Defendants, Cross-Complaints and Appellants.

-ooOoo- This appeal addresses whether cotenancy provisions¹ in a lease for retail space in a shopping center are unconscionable or unreasonable penalties and, thus, not binding on the landlord. The enforceability of cotenancy provisions has not been discussed in an opinion published by a California appellate court. This opinion does not establish a categorical rule of law holding cotenancy provisions always, or never, are enforceable. Instead, it illustrates that the determination whether a cotenancy provision is unconscionable or an unreasonable penalty depends heavily on the facts proven in a particular case. Here, the facts show the provisions were not unconscionable and only the rent abatement provision operated as an unreasonable penalty.

Grand Prospect Partners, L.P. (Grand Prospect), the owner and operator of the Porterville Marketplace shopping center, filed this action to challenge the enforceability of provisions in its commercial lease with Ross Dress For Less, Inc. (Ross). The provisions conditioned Ross's obligation to open a store and pay rent on Mervyn's operating a store in the shopping center on the commencement date of the lease, and also granted Ross the option to terminate the lease if Mervyn's ceased operations and was not replaced by an acceptable retailer within 12 months.

The opening cotenancy condition was not satisfied because Mervyn's filed for bankruptcy and closed its store in 2008. As authorized by the lease, Ross took possession of the space, never opened for business, never paid rent, and terminated the lease after the 12-month cure period expired.

Grand Prospect claims Ross 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. Thetrial court agreed with both theories, found Ross had breached the lease by failing to pay rent and terminating the lease, and directed the jury to determine the amount of damages resulting from each breach. The jury awarded $672,100 for unpaid rent and approximately $3.1 million in other damages caused by the termination.

Ross appealed, contending the cotenancy provisions in the lease were not procedurally and substantively unconscionable and were not an unreasonable penalty.

As to unconscionability, which requires proof of both procedural and substantive unconscionability, we conclude the evidence establishes there was no procedural unconscionability. The parties were sophisticated and experienced in the negotiation of commercial leases for retail space, their negotiations involved several drafts of the letter of intent and subsequent lease, and Grand Prospect's decision to approach Ross first about renting the space was a free and unpressured choice. Ross's insistency on cotenancy provisions during negotiations did not make the lease a contract of adhesion or otherwise deprive Grand Prospect of a meaningful choice.

As to unreasonable penalties, the rent abatement and termination provisions must be examined separately because they involve separate consequences triggered by different (albeit partially overlapping) conditions. 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 is supported by its findings of fact that (1) Ross did not anticipate it would suffer any damages from Mervyn's 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 is no reasonable relationship between $0 of anticipated harm and the forfeiture of $39,500 in rent per month and, therefore, the trial court correctly concluded the rent abatement provision was an unenforceable penalty.

As to the lease termination provision, California courts have adopted a specific rule that holds no forfeiture results from terminating a commercial lease based upon the occurrence of contingencies that (1) are agreed upon by sophisticated parties and (2) have no relation to any act or default of the parties. These facts are present in this case and, therefore, the rule compels the conclusion that the termination provision did not constitute a forfeiture. Because no forfeiture occurred as a result of the termination, the termination provision did not create an unreasonable penalty.

We therefore modify the judgment to award damages only for unpaid rent.

FACTS

The Parties

Ross is the nation's largest retailer of off-price apparel and home fashion. The trial court found Ross had more than 259 stores in California and more than 1,000 stores nationwide. In 2008, Ross's annual sales totaled more than $6.4 billion.

Grand Prospect is a California limited partnership. Its sole asset is a shopping center named the Porterville Marketplace, located in Porterville, California.

Grand Prospect is managed by David H. Paynter, its sole general partner. Paynter received a bachelor's degree in business administration, majoring in finance. At the time of trial, he had over 33 years of experience in real estate. In 1998, Paynter formed his current company, Paynter Realty and Investments, which is based in Tustin, California. Paynter Realty and Investments is involved in both development of shopping centers and managing those properties. Paynter testified that he had been partners in developing over 60 shopping centers and that Paynter Realty and Investments currently owned and operated seven shopping centers. Two of those shopping centers (Clovis and Visalia) leased space to Ross.

Grand Prospect's sole limited partner is John F. Marshall, who is a 50 percent owner. Marshall is a commercial real estate broker who received a college degree in business administration in 1974. Marshall started working in real estate in 1976, movedexclusively to commercial real estate in 1979, and started his own real estate company in 2001. His company specialized in selling and leasing shopping centers. Marshall met Paynter in 1983 when the both were working on a shopping center project in Turlock. Marshall was familiar with Ross, having acted as its broker in numerous lease transactions between 2002 and 2011.

The Negotiations

In 2005, a former grocery store building became available at the Porterville Marketplace and Marshall contacted Ross to see if Ross would be interested in the location. In October 2005, Marshall (acting as Grand Prospect's broker) showed Mike Seiler of Ross the site and several other locations in Porterville. Seiler worked with Marshall to prepare a letter of intent, which was similar to the one used for a store in a Clovis shopping center managed by Paynter. Seiler, not Marshall, was responsible for the letter's contents. After making changes, Seiler emailed the letter of intent to Marshall and directed him to forward it to Paynter.

The first version of the letter of intent presented to Paynter was dated October 20, 2005, set the initial term of the lease at 10 years with minimum rent for the first five years at $10.50 per square foot with an increase to $11.00 for the second five years. The letter of intent provided four five-year renewal options, each with a $0.50 increase in rent. The letter of intent also contained cotenancy provisions that required, at commencement and throughout the full term of the lease, 70 percent of the leasable floor area in the center be occupied by retail tenants, including Target and Mervyn's occupying 87,000 and 76,000 square feet, respectively.

The negotiations of the letter of intent were delayed when Paynter learned Target was considering moving out of the shopping center. Eventually, Target decided to stay in Porterville Marketplace and expand its store. As a result, Paynter delivered his revisions to the letter of intent to Ross in the spring of 2007.

After further negotiations, the final letter of intent, dated July 11, 2007, was signed by the parties. The minimum rent was $13.25 for the first 10 years and $14.00 for the first option period with $0.50 increases for each of the three remaining option periods. The calculation of the 70 percent occupancy requirement stated that it would exclude Ross "and Target as to the Commencement Date to be further negotiated in the lease, from the numerator and denominator ...." Target was required to occupy 126,000 square feet on the commencement date and during the term of the lease; Mervyn's 76,000 square feet.

With the nonbinding letter of intent in place, the parties began negotiating the lease for 30,316 square feet of space in the Porterville...