Trial Necessary to Determine Whether Cotenancy Clause Constituted "Liquidated Damages"

Facts: A clothing retailer tenant signed a lease for space at a shopping center. The lease included cotenancy provisions that required the owner to lease space to three major tenants. If all three tenants were open and operating continuously, the retail tenant paid minimum rent. In the event that one or more of those tenants stopped operating, the retail tenant could pay reduced rent and it would be considered a breach of the lease. One of the tenants moved out of its space before the expiration of its lease. The owner found a replacement tenant before the retail tenant could begin paying reduced rent. When the replacement tenant moved out of its space, the retail tenant invoked the cotenancy provisions. The owner argued that the departure of the required tenant didn’t trigger the cotenancy clause because the remaining required tenants still brought foot traffic to the center and the retail tenant’s profits didn’t decrease. According to the owner, the fact that the retail tenant didn’t suffer any economic harm would effectively make the cotenancy provisions “liquidated damages” that were punitive, and not provide the intended result of compensating the retail tenant for its actual damages. Instead, the owner would lose a significant amount of money that was not commensurate with damages.

The retail tenant continued to pay minimum rent “under protest,” and asked a trial court to enforce the provisions. The owner sued the tenant, asking the trial court for a judgment in its favor and to order the tenant to pay minimum rent.

Decision: A Nevada trial court concluded that a trial was necessary.

Reasoning: In explaining its decision, the court noted that, although it might be true that the departure of the tenant and the replacement tenant didn’t economically harm the retail tenant, the owner and retail tenant were sophisticated parties that had negotiated the lease at “arm’s length” with their attorneys and that the owner shouldn’t now try to get out of the provisions it agreed to—that the retail tenant could pay reduced rent rather than minimum rent until a suitable tenant was open and operating in the now-vacant space.

It also addressed the owner’s argument that reduced rent would drastically harm the owner and would therefore qualify as liquidated damages that were designed to be punitive and, therefore, would be unenforceable. The trial court noted that liquated damages were an issue that couldn’t be determined by a judge. Rather, a jury trial was necessary.

• Boca Park Marketplace Syndications Grp., LLC v. Ross Dress for Less, Inc., March 2018