What Is a Co-Tenancy Clause?
A co-tenancy clause in retail lease contracts allows tenants to reduce their rent if key tenants or a certain number of tenants leave the retail space. A large or key tenant is a big draw for traffic, especially in malls, and is often one of the major reasons a tenant chooses to locate in a specific mall. A co-tenancy clause provides the tenant with some form of protection in the form of reduced rent to compensate for the loss of traffic.
Understanding the Co-Tenancy Clause
Co-tenants are typically the anchor tenants in a mall. They are the large, popular stores that attract increased traffic that spills over to other stores in the same location. In times of economic stress, when some retailers are forced to close outlets to shave costs, landlords usually end up losing a lot of revenue. Exercising co-tenancy clauses further amplifies the loss of revenue as remaining tenants demand a reduction in rent, the stress of which could ultimately lead to bankruptcy.
A co-tenancy clause is usually a hotly negotiated item in a retail lease. Landlords dislike co-tenancy provisions because they can't control the actions of other tenants or occupants in the shopping center. They believe a certain amount of vacancy is unavoidable, and their revenue from the shopping center can be severely impacted by a co-tenancy clause.
Whether a tenant obtains a co-tenancy clause is largely dependent on their negotiating leverage. Landlords seek out national and large regional tenants because of their name recognition, ability to pay higher rents, and their staying power. They're also desirable because of their drawing power and ability to raise the public profile of a shopping center. These tenants are in a better negotiating position than smaller tenants to get co-tenancy protection.
Common Landlord Conditions for Co-Tenancy Clauses
Usually, a landlord will want a tenant to satisfy certain conditions in order to obtain a co-tenancy provision in a lease. The biggest condition is often a stipulation that the tenant cannot be under default on the lease if they wish to invoke a co-tenancy clause. A landlord may also require that the tenant show evidence of a drop in sales during the co-tenancy violation period as compared to the period prior to the violation. A landlord will also want to make sure that if the tenant invokes a co-tenancy provision, there will not be multiple remedies allowed under the lease for such violation. A landlord does not want to be in a situation where the tenant obtains the benefit of a co-tenancy violation remedy and then sues for other damages.