Commercial Lease Negotiations: The Ins and Outs of Co-Tenancy Clauses

Business owners! Are you in the process of negotiating a commercial lease for your retail space? If so, you may have come across the term “co-tenancy clause.” A co-tenancy clause is an important consideration for tenants leasing space in a shopping center, as it provides compensation for loss of consumer traffic related to changes in the tenancy of the shopping center. But what should you consider when negotiating this clause? Let’s dive in!

The co-tenancy clause allows the tenant to receive a reduction in its rent, terminate its lease, or both, if certain named tenants (mostly anchor tenants) cease operations at the center, or if tenants occupying a certain percentage of the shopping center are no longer open for business. This is important because anchor tenants draw consumer traffic and are often one of the major reasons a mid- or small-sized retail tenant chooses to locate its operations in a specific shopping center. A “dark” shopping center means less consumer traffic because there are fewer stores to visit and consumers feel less welcome at a partially closed center.

As a tenant leasing space in a shopping center, you have a legitimate interest in the vitality of the center. A busy shopping center increases your consumer traffic and thereby increases your revenues. It also directly impacts the rent paid by you because tenants always pay higher rents for space in successful centers rather than vacant ones. Without a co-tenancy clause, you may not receive the benefit of your bargain. You may sign a long-term lease in a fully occupied center initially, but midway through the lease term, find yourself in a center with few operating stores and little consumer traffic. Without the co-tenancy clause, you may be locked into a long-term lease with high rental payments and little prospect for consumer traffic.

With the increased trend of online shopping, many retailers have shifted their strategy by opting for fewer physical locations and more internet-based sales. Many shopping centers have suffered as a result of this strategy. Co-tenancy clauses have only increased in importance for many retail tenants trying to protect themselves during financially uncertain times.

When negotiating a co-tenancy clause, you should consider the nature of the center and the lease to determine the type of co-tenancy clause that best suits your particular needs. There are various types of co-tenancy, such as lease contingency co-tenancy, possession co-tenancy, opening co-tenancy, and ongoing co-tenancy. A retail tenant should also consider what kinds of businesses in the shopping center are most important to its particular operations at the center.

In structuring co-tenancy protection in a large shopping center, a retail tenant may consider requiring that the center have other operating tenants in close proximity to the tenant’s space, or all the center’s retail spaces, or a certain percentage, open and operating at the time the tenant opens for business. The tenant may also consider negotiating for the repayment of the unamortized cost of its improvements on any termination of the lease because of a co-tenancy violation, but this is a drastic remedy.

Co-tenancy clauses can expose the landlord to a lot of risk. It is important to negotiate remedies that reduce the tenant’s risk of financial exposure while considering how much to invest at the site. Rent reduction is the most common remedy, but to have greater flexibility, a tenant should consider negotiating for the right to go dark in addition to the reduction of rent.

In conclusion, a co-tenancy clause is an important consideration for retail tenants when negotiating a commercial lease. It provides protection against the risk of loss of consumer traffic due to changes in the tenancy of the shopping center. As a tenant, you should carefully consider the type of co-tenancy clause that best suits your needs, based on the nature of the center and your particular business concerns. When negotiating remedies for a breach of the co-tenancy clause, it’s important to tailor them to your specific business concerns while considering the amount of investment at the site.

Ultimately, negotiating a commercial lease can be a complex and challenging process, and seeking legal advice can help ensure that your interests are protected. So, be sure to consult with a qualified attorney before entering into any lease agreement, and may the co-tenancy clause be ever in your favor!