Co-Tenancy Clauses Require Adroit Negotiations for Both Landlords, Tenants

Co-tenancy clauses allow key retail tenants a reduction in rent if other key tenants or a certain number of other tenants leave a center.  While not common for smaller retailers, they are more common for anchor tenants.  Anchor stores and other key tenants draw significant traffic to centers, and they are often among the primary reasons other tenants select their location.

With all of the challenges plaguing some retailers, including store closings by such major national retailers as Macy’s, K-Mart, Sears, Sports Authority, Kohls and Toys-R-Us, landlords could face significant losses when their remaining tenants demand rent reductions based on their co-tenancy clauses.

leasesign2Typical ongoing co-tenancy clause requirements state that if one or more specified co-tenants are no longer open and operating, the landlord has a set timeframe (typically 90 to 180 days) during which it must secure one or more comparable replacement tenants.  If it fails to do so, the remaining tenants with ongoing co-tenancy clauses will pay alternate rent amounts until replacement tenants are operating.  Ultimately, if no replacements are found for periods typically ranging from 12 to 18 months, the remaining tenants may have the right to terminate their leases.

The areas for negotiation of these clauses for landlords include the right to substitute a co-tenant with more than one replacement tenant when a large space has been vacated or to have one or more replacement co-tenants take less than 100 percent of a vacated space.

The truth is that co-tenancy is one of the most difficult aspects of retail leases, and this has become more evident in today’s business environment.  Because all negotiations will vary considerably based on the size, type and track record of retail properties and the nature of the retailers that are involved, it is now more imperative than ever for tenants and landlords to consult very closely with highly experienced and knowledgeable real estate attorneys who are able to negotiate and hone the very best possible terms and conditions for their co-tenancy requirements.