The shopping center property looks like a winner for any incoming tenant. Storefronts are full, foot traffic is promising and there are a couple of well-known anchor tenants that should bring in plenty of customers. But the American retail landscape is changing, sometimes rapidly, leaving store operators and landlords in a potential bind.
This ongoing transformation has led to a common new sticking point in lease negotiations: the co-tenancy clause.
What is a co-tenancy clause?
In a retail lease contract, a co-tenancy clause allows a tenant the opportunity to lower their rent, change certain conditions of the lease, or potentially even pull out of the agreement altogether, based on changes with other shopping center tenants.
For example, if an anchor store shuts down and leaves the shopping center, that may trigger another, smaller tenant’s co-tenancy clause, lowering their rent because of the expected hit to foot traffic. One of these clauses may also be tied to a certain percentage of storefronts becoming vacant, or the exit of a specific, named tenant.
A sticking point in lease negotiations
A co-tenancy provision is often the subject of long discussions between a landlord and prospective tenant.
The tenant wants to protect themselves, and a co-tenancy clause can be a useful tool. If the shopping center sees a huge drop in foot traffic because of a key store closure, the tenant with a co-tenancy clause can reduce their financial burden to accommodate the loss in customers.
A shopping center landlord, however, may not want to agree to any co-tenancy clause in a lease, as it increases the risk of a potential tailspin. The loss of one tenant could have harmful ripple effects throughout the mall. In fact, many landlords are actively trying to do away with co-tenancy clauses in lease contracts, according to one news report.
Coming to an agreement
Oftentimes, a landlord will request a tenant meet certain other conditions before pursuing changes through the co-tenancy clause. That may include:
- The tenant demonstrating a drop in sales
- A window of time to replace a lost anchor tenant
- The tenant not be in default under the terms of the lease
- The tenant be in operation when the triggering event occurs
The retail landscape is constantly changing. Both landlords and tenants want to do everything possible to protect themselves during this period of unpredictability. Whether entering into a lease with a party for the first time, or negotiating a renewal, it’s important for all language in the contract to be clear and thorough. Nobody likes unfortunate surprises.