Leasing 101: The Co-Tenancy Clause

Not all retail tenants can get a landlord to agree to a co-tenancy provision, but this still should be part of the tenant’s discussion with its broker or landlord.

A co-tenancy provision allows a tenant to pay a reduced amount of rent when certain conditions are not met either before the store opens or once the store is operating.

Usually, the condition is that certain other stores, such as anchors, or a certain percentage of stores in the center have to be open for business.

For example, if a certain anchor tenant plus 70% of the remaining space in the center is not open for business, then tenant can exercise the remedy.

The reasoning is that a tenant is spending a lot of money for a particular site and center, and if that center is not operating as it should, then tenant should receive a remedy. By negotiating this provision into a lease, a tenant will protect itself in case other stores close or fail to open due to the economy.

The remedy if tenant is not yet open for business can be a delay in store opening without penalty or opening and operating at a reduced rent.

If tenant already is open, the tenant’s remedy usually is a reduction in rent during the period in which the co-tenancy requirement is not met. Tenant also can negotiate a termination right if the co-tenancy matter is not cured within a certain period of time, such as 180 days.

The co-tenancy provision can be very effective protection for a tenant that is leasing space in a shopping center in large part because of the customer traffic it may receive from neighboring tenants.

Tenant is paying a premium rent for this high profile tenant mix and should have a remedy if landlord is unable or unwilling to provide it.