DEALING WITH RETAIL VACANCIES

11/28/2018 | Articles & Alerts, Real Estate Transactional

With numerous retail stores closing locations in 2018 and 2019, co-tenancy clauses and use and building restrictions in retail leases continue as major issues that could have damaging effects on shopping centers and malls. The closures of such stores as Sears, J.C. Penney, Kmart, Macy’s, Toys R Us and Lord & Taylor have caused significant vacancies in retail properties, and have a domino effect resulting from the co-tenancy provisions in the other leases of the properties. These co-tenancy provisions permit the other tenants to pay less rent and sometimes terminate their leases because of specific anchor tenant vacancies and vacancies in the overall occupancy level of the property. Although there is normally a grace period to fill these vacancies, the ability to replace anchor tenants and the use and building restrictions in the other leases can severely hinder a landlord’s ability to prevent the loss of value to these properties.

The number of retailers that have a sufficiently large footprint to fill the entire vacancy caused by some of the closures is very limited, so many landlords have been forced to divide vacant premises into several smaller stores. To cure the breach of a co-tenancy provision, however, there is sometimes a limit on the number of tenants that can fill an anchor tenant vacancy and a limit on the type of store that can qualify as a replacement tenant.

Also, due to the limited number of retailers that are expanding and opening stores, many landlords are attempting to redevelop retail shopping centers into mixed use projects that include office, residential and sometimes industrial uses. Other leases and easement agreements that are binding on the shopping centers commonly have use and building restrictions that limit redevelopment opportunities and protect the desires of the other tenants to be part of a retail shopping center.

When negotiating letters of intent and retail leases in this retail market, it is critical to focus on co-tenancy provisions and use and building restrictions. Understanding that tenants have a need to ensure that they are operating in a vibrant and active shopping center and require the benefit of foot traffic caused by the other stores of the property, landlords need to have as much flexibility as possible in dealing with large vacancies, including the ability to redevelop buildings with numerous tenant spaces and various uses.

It is also important to evaluate renewals of existing leases and, when negotiating the length of the renewal term and the rent, landlords should attempt to try to modify existing co-tenancy provisions and use and building restrictions. A landlord might find it beneficial for a tenant to pay less rent in order to provide for more flexibility in filling an existing or future vacancy. In addition, a tenant might agree to continuously operate at the property in exchange for less rent, which could be important to keep the other tenants paying full rent under their co-tenancy provisions.

The loss of a major tenant can present challenges to shopping center and mall owners, but flexibility in the other leases can allow for opportunities to reposition a property and increase its value.

Scott C. Butler is a principal in the Real Estate, Business & Finance group at Kaplin Stewart in Blue Bell, PA. Mr. Butler may be reached at 610-941-2560 or via email sbutler@kaplaw.com.

Related Practices: Real Estate Transactional