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Gross Receipts Fall, Lease Terminated
by Ron Davis
Many years of prosperity have not saved a California shopping center tenant from getting the heave-ho from space occupied since 1983.
The shopping center is Coddingtown Mall in Santa Rosa, and the tenant operated a restaurant named Hof Brau that was successful there until recent years. That’s when tough economic conditions caused a slump in business.
Just prior to that, a company with redevelopment plans purchased an interest in Coddingtown Mall. Those plans included combining the space occupied by Hof Brau with adjacent shop space. The aim was to oust the Hof Brau tenant and bring a larger national retail or restaurant chain into that location.
Hof Brau’s sales records showed that its income was insufficient to prevent the termination of the lease. Estimates also indicated that a national chain in the restaurant’s location could do $3 million to $5 million in annual sales. That compared to Hof Brau’s revenue that had fallen to about $1.1 million. Moreover, a leasing expert noticed that Hof Brau’s revenue had recently been declining by about 5 percent to 15 percent a year.
With confirmation from potential suitable tenants to replace Hof Brau, plans to terminate that lease began in earnest. A shopping center official then said she attempted to get the annual sales report from the Hof Brau owner, but apparently without success. Shopping center officials finally sent the Hof Brau owner a “notice of default.”
In response, the Hof Brau owner submitted the requested sales report and certified it was correct. Nevertheless, plans to terminate the Hof Brau lease moved forward, though the Hof Brau owner was allowed to stay on as a tenant if he was willing to relocate his restaurant to a different part of the shopping center.
The Hof Brau owner responded by suing for breach of lease and by arguing that the terms of termination were unenforceable.
A California court determined that the terms of the lease were valid and enforceable and that the notice of termination of Hof Brau’s tenancy was proper and legal. The tenant appealed that decision.
A California appellate court upheld the lower court ruling, explaining, “During most of the years the [Hof Brau] lease was in force, [the shopping center owners] had no right to terminate. When they did have that right, there were good reasons, including fairness for their decision not to do so…. [The lease] neither established a covenant or condition, nor defines an event constituting a tenant breach or default. By its terms, it creates an option to terminate the lease upon the happening of a specified condition—that the tenant’s gross receipts fall below a benchmark number. This option is available to either party and it is not a breach of any covenant or condition of the lease if the condition giving rise to it occurs.”
(Samii v. Codding Enterprises, 2011 WL 2295280 [Cal.App. 1 Dist.])
Decision: July 2011
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