March 25, 2016 | Rick Zelinsky
Co-Tenancy – Are Your Negotiating the Right Lease Language?
Empty store fronts or an incorrect tenant mix hamper a retailer’s ability to maximize their investments. Retailers who want to attract new customers to increase sales growth and who are mall or strip center based and rely on heavy foot traffic to attract new clientele, are directly affected by a center’s occupancy. As such, it is critically important for these retailers to negotiate advantageous lease language surrounding co-tenancy.
Here are four key areas a retailer should focus on:
1. Opening Co-Tenancy
The best way to ensure a strong grand opening in a new center is a mall that is substantially occupied. An Opening Co-Tenancy provision will allow for reduced rent in the event that mall occupancy is below a pre-determined percentage. While most common for new centers under construction, opening co-tenancy provisions can also be found in centers undergoing renovation or repositioning.
2. Operating Co-Tenancy
Once a store is open, an operating (or ongoing) co-tenancy clause ensures full rent is paid only when the center remains substantially occupied. Again based on a negotiated percentage, an operating co-tenancy provision helps protect tenants in the event of a decline in overall mall occupancy.
3. Key “Anchor” Tenants
Certain high-profile tenants are often considered anchor tenants and, in some cases, contribute disproportionally to the success of the center. Commonly a department store in a regional mall or a grocer in a strip center, key tenants drive significant traffic to the center. Lease provisions incorporating named anchor tenants typically invoke an alternative rent structure if an anchor tenant goes dark.
4. Replacement Tenants
While mall occupancy is always changing, to draw the appropriate customer base it is imperative that the types of tenants (and mix of specialties) occupying a mall remain consistent. Without a replacement tenant provision, landlords could choose to replace retail tenants with medical, office or other non-traditional retailers that would not attract the same foot traffic. In this case, conditions on replacement tenants can be agreed upon to ensure appropriate businesses are being selected as replacements.
Identification of a co-tenancy violation is often a difficult undertaking since it is incumbent upon store staff and regional management to note closures and keep the corporate office informed. Once a co-tenancy violation is noted, a landlord will have a defined cure period in which they can provide a replacement tenant to fill the vacancy. It is only upon an unsuccessful cure where a remedy can be invoked. Remedies typically are one of three categories:
1) Rent Abatement – A reduction in fixed rent or a change to percentage rent are two common rent abatements. In both cases, the tenant’s cost to operate the store is reduced.
2) Lease Termination – While not very common, some co-tenancy provisions allow the tenant (or landlord) to terminate the lease as a result of the co-tenancy violation.
3) Delayed Opening – This violation only applies to opening co-tenancy provisions. It allows the tenant to delay their store opening until a certain occupancy percentage is reached in the center.
The ability for a retailer to insist on one or more co-tenancy elements is largely related to the negotiating leverage they have as a tenant. While tenants with greater brand recognition and national presence are more likely to achieve positive results, co-tenancy is something all tenants should attempt to negotiate into their leases.
While negotiating a favorable co-tenancy provision is important, equally imperative is having a lease administration system that is able to monitor and take action against co-tenancy violations. Types of co-tenancy, anchor tenants, key dates and alternative rent terms are all critical elements that need to be captured in the system.