2024 was a relatively quiet year with respect to appellate opinions relating to the landlord-tenant relationship. However, courts published opinions regarding the enforceability of limitation of liability clauses in leases and the rights of cotenants in large, multi-tenant commercial properties.

Court of Appeal holds that provision in lease limiting landlord’s liability was invalid where that liability was necessarily based on the landlord’s violation of statutory duty to disclose existence of hazardous substance on nonresidential real property

In Epochal Enterprises, Inc. v. LF Encinitas Properties, LLC Epochal Enterprises, Inc., also known as Divine Orchids (“Epochal” or “tenant”), entered into a commercial lease agreement with LF Encinitas Properties, LLC and Leichtag Foundation (“defendants” or “landlords”). The lease included a limitation of liability clause which stated that the landlords were not personally liable for any provisions of the lease or the premises, and the tenant waived all claims for consequential damages or loss of business profits. After Epochal sued the defendants, a jury found the defendants liable for premises liability and negligence.

The jury awarded Epochal damages for lost profits and other past economic loss. However, the trial court granted the defendants’ motion for judgment notwithstanding the verdict (“JNOV”), reasoning that the lease agreement’s limitation of liability clause prevented the plaintiff from recovering the economic damages the jury awarded.

The Court of Appeal, Fourth Appellate District Division One reversed the order granting JNOV in the defendants’ favor, finding that the limitation of liability clause did not bar Epochal’s recovery of damages. The Court reasoned that the jury’s award of damages necessarily implied a finding of gross negligence on the part of the defendants, which would be outside the scope of the indemnification clause. Further, the Court held that the limitation of liability clause was void to the extent that it sought to shield the defendants from liability for their violations of the Health and Safety Code, as it violated public policy under Civil Code section 1668.

California Supreme Court holds that a cotenancy provision in retail lease reflected parties’ agreement regarding acceptable alternative performance of negotiated obligations and was enforceable

In JJD-HOV Elk Grove, LLC v. Jo-Ann Stores, LLC a landlord, JJD-HOV Elk Grove, LLC (“JJD”), owned a shopping center in Elk Grove, California, and leased space to Jo-Ann Stores, LLC (“Jo-Ann”). The lease included a cotenancy provision allowing Jo-Ann to pay reduced rent if the number of anchor tenants or overall occupancy fell below a specified threshold. When two anchor tenants closed, Jo-Ann invoked this provision and paid reduced rent for about 20 months until the occupancy threshold was met again. JJD filed a complaint against Jo-Ann for declaratory relief and breach of contract, arguing that the parties’ cotenancy provision is an unenforceable penalty pursuant to Grand Prospect Partners, L.P. v. Ross Dress For Less, Inc. (2015) 232 Cal.App.4th 1332.

The trial court ruled in favor of Jo-Ann, finding the cotenancy provision to be an alternative performance rather than a penalty. The Court of Appeal, distinguishing the case from Grand Prospect which found a similar provision to be an unenforceable penalty.

The California Supreme Court affirmed holding that the provision was a valid form of alternative performance, allowing JJD a realistic choice between accepting lower rent or taking steps to increase occupancy. The Court found that the provision did not constitute an unreasonable penalty under Civil Code section 1671, nor did it result in a forfeiture under section 3275. The Court emphasized that contracts should be enforced as written, especially when negotiated by sophisticated parties. While expressing no opinion on the validity of Grand Prospect’s holding, the Court noted that the cotenancy provision in Grand Prospect is readily distinguishable from the cotenancy provision in the case at hand.