Retail centers are planned and operated on a methodical formula. Typically, retail spaces like shopping malls or retail centers have an “anchor” tenant surrounded by various smaller tenants. That “anchor” tenant is what drives most foot traffic to the area. These can be a grocery store in a strip center, or a department store in a mall. There is typically one large store that attracts the majority of traffic for itself and the smaller businesses surrounding it.
The large anchor stores along with its smaller neighbors form a cohesive “retail ecosystem” that works very well for shoppers. This creates an enjoyable and easy shopping experience, allowing shoppers to get all of their errands done in one place. But, what happens when one of the anchor stores, that was driving most of the traffic to the shopping center, or multiple other tenants, leaves?
This is where the co-tenancy clause comes in. A co-tenancy clause is a part of a retail lease agreement that states that if an anchor tenant or multiple tenants in a center leave, then those smaller tenants left will get some sort of aid. This can mean a reduction in rent, or sometimes even the termination of a lease.
There are two types of co-tenancy clauses, opening and operating. Opening co-tenancy agreements apply to new shopping centers or malls. These state that the smaller tenant does not have to open or pay their rent in full until the larger anchor store(s) open. Operating co-tenancy agreements apply to existing shopping centers or malls. These state that the tenant will get a reduction in rent or a terminated lease if the larger anchor store(s) close.
During the negotiating period, it will be very crucial to cover all of your bases and ask the important questions. Keep in mind, both the tenant and the landlord want to be successful. Also, remember that a landlord’s chances of including co-tenancy provisions depend on the current economic conditions and the tenant mix.
For example, you will want to discuss what a suitable replacement tenant would be, were one to leave. Will it be a store of the same level as the one previously, or will you have to get creative with the type of business you put in to attract foot traffic? This is where you can negotiate the types of provisions you could receive if there were to be amendments made to the co-tenancy clause.
While it is smart to work with a professional who is well versed in retail leases, it is also smart to familiarize yourself with the best practices in dealing with co-tenancy clauses. First, you want to cover all of your bases and define the provisions concerning opening and ongoing co-tenancy clauses. Second, be specific in your lease agreement even when it comes to timing, tenants and other important information. Lastly, provide yourself a cushion between the time a co-tenant opens and when you open to give yourself time to get everything in order.
We hope this clears some things up and offers you some insight into what a co-tenancy clause looks like. It might be overwhelming at first, but as mentioned above, there are professionals ready to help you through this process. If you are needing help for your business, don’t hesitate to reach out to one of us!