Co-Tenancy Provisions in Retail Leases

Co-Tenancy Provisions in Retail Leases

In a previous post, have written about exclusive use provisions in leases (see Everyone Benefits From Collaborative Drafting of Exclusive Use Provisions in Commercial Leases). Another clause which can be very helpful to retail tenants is the co-tenancy provision.  These provisions can be found in many shopping center leases and can be very beneficial to tenants.  Landlords, however, must be very careful when drafting them because they can come back to haunt you.

A co-tenancy provision permits a tenant to exercise remedies if certain conditions are not met regarding the shopping center. These conditions generally are:

• A key or anchor tenant executing a lease or opening for and continually operating its business; and
• An occupancy threshold for the shopping center.

If conditions are not met, a tenant’s remedies could include:

• Rent abatement;
• Extension of the commencement date or rent commencement date;
• Lease termination; or
• Damages.

Not all tenants have the leverage to negotiate co-tenancy provisions.  Small, local tenants generally don’t have the strength to convince a landlord that such a provision is a lease requirement.  However, bigger, more financially secure tenants occupying larger space are more likely to persuade a landlord to include a co-tenancy clause.  National tenants, large regional tenants and even local tenants with multiple locations will command this consideration.

But that does not mean there is no give and take.  Landlords should seek to keep the requirement as general as possible.  The co-tenant, for instance, should not be names.  If the anchor is Target, it shouldn’t matter to the tenant if Home Depot is the anchor at a later date.  Therefore, landlord should seek to tie the co-tenancy to require only that a certain percentage of space in the shopping center be leased and operating at all times.  Tenants will push for as much specificity as possible, identifying the specific space that must be occupied and the specific tenant that must be occupying the space.  For example, the tenant might demand that Target occupy the “Target Space” (which is identified on the site plan) and continuously operate for the entire term of tenant’s lease.  Failing that, tenant’s remedy could be to reduce rent to 2% of its gross revenues each month.

A landlord should not agree to such a broad definition or indefinite remedy without allowing for the opportunity to cure the default.  If the tenant and the specific space must be identified, landlord must have the ability to find a replacement tenant or to subdivide the space so landlord can rent to multiple tenants (thus providing adequate foot traffic).

Clearly, any co-tenancy provision will benefit a tenant.  But a thoughtful co-tenancy provision which protects a landlord can help a tenant and will benefit the shopping center and all the tenants in the center.  When a tenant is successful, the shopping center is successful and vice versa.  Landlord and tenant need to consider that though they clearly have competing interests in drafting this provision, those interests are only adverse if the shopping center or the tenant is in trouble.  If the tenant uses the co-tenancy provision as a loophole to abate rent or seek early termination or delay commencement, the consequences to the shopping center will be harsh.  Sometimes that is necessary and required.  But sometimes, a landlord only needs a little time to fix what is only a small problem and a properly drafted clause will assure a proper fix for everyone.