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The California Supreme Court has unanimously upheld a co-tenancy provision in Jo-Ann Stores LLC's lease, affirming the craft retailer's right to pay reduced rent at a Sacramento-area shopping center. The decision, issued Thursday, supports Jo-Ann's ability to invoke the clause due to the mall’s failure to meet specific occupancy requirements.

The ruling affirms a 2022 appellate decision, confirming that Jo-Ann's co-tenancy provision is an "alternative performance of the contract" rather than a penalty under Section 1671 of California's Civil Code. That law restricts enforcement of liquidated damages clauses deemed unreasonable penalties for contract breaches. The court clarified that the provision allows Jo-Ann to comply with the lease by paying reduced rent when certain conditions are unmet.

Jo-Ann's lease, dating back to 2004, includes a substitute rent clause triggered if the shopping center lacks either three anchor tenants or 60% occupancy. In 2018, Jo-Ann invoked this clause, marking its third use of the provision. While JJD-HOV Elk Grove LLC, the landlord, argued this constituted a penalty, the Supreme Court rejected the claim, emphasizing that the clause merely reflects a negotiated allocation of risks and benefits.

"If JJD wishes to avoid receiving a lower level of rent, it can choose to make inducements to attract additional anchor tenants or raise the overall occupancy rate," the justices wrote.

The court underscored the broader context of co-tenancy provisions in commercial leases, noting their common use to protect tenants from reduced foot traffic and sales in underperforming malls. The ruling further highlighted that JJD retains control over occupancy rates and could take proactive measures to improve tenancy conditions.

Jo-Ann's legal team lauded the court’s recognition of co-tenancy clauses as part of the lease framework, not a penalty. Meanwhile, JJD's attorney, Jacob Sarabian, expressed disappointment, noting the difficulties landlords face in a shifting retail landscape, exacerbated by e-commerce and pandemic-era changes.

The case underscores a significant divide among California appellate courts regarding the enforceability of co-tenancy provisions, a point Jo-Ann's counsel, Mark McKeen, previously highlighted.

The case is JJD-HOV Elk Grove LLC v. Jo-Ann Stores LLC, case number S275843, in the California Supreme Court.