In order to lure new tenants to a shopping center, landlords often have to make promises that certain anchor tenants will remain open for business at the shopping center. As a result, the new tenant will want a provision added to their lease which states that in the event those certain anchor tenants close for business, the new tenant will have the right to either pay less rent or terminate their lease. This type of provision is often called a “co-tenancy” provision.
The reasoning for a co-tenancy provision is that if an anchor tenant closes for business, then less customers will visit the shopping center and, therefore, the new tenant’s sales will decrease. Understanding this reasoning, landlords should require the following protections in any co-tenancy provision:
- The new tenant should be open and operating in their premises in order to receive any benefits from the co-tenancy provision. If the new tenant is not open, regardless of any anchor tenant closures, the new tenant will not be losing any sales.
- The new tenant should actually lose sales to be able to exercise their remedies under the co-tenancy provision. When evaluating whether a tenant lost sales, it is important to compare the tenant’s sales during the same time periods in each calendar year so that seasonal changes in the tenant’s business are taken into consideration.
- In the event the new tenant exercises a renewal option while an anchor tenant is closed, the new tenant should not be entitled to any remedies under the co-tenancy provision related to such closure. If the new tenant voluntarily renews the lease, it must be achieving sufficient sales regardless of the breach of the co-tenancy provision.
- The new tenant should not be in default of their lease and also have the right to any remedies under the co-tenancy provision.
- The landlord should be able to cure a breach of the co-tenancy provision by replacing the anchor tenant with another tenant meeting a criteria negotiated between the parties.
- The new tenant should not be entitled to pay decreased rent for the entire term of the lease. At some point, the new tenant should elect to either terminate the lease or agree to pay full rent under the lease regardless of the breach of the co-tenancy provision.
Working together, a landlord and a tenant should be able to negotiate a co-tenancy provision that will resolve the tenant’s concerns regarding a loss of sales resulting from an anchor tenant’s closure, but still provide the landlord will certain protections so that the tenant only receives remedies if they are actually harmed.
Article appeared in Mid Atlantic Real Estate Journal, June, 2010.