CO-TENANCY – What’s In Your Crystal Ball? (PART 1: the basics)

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As the retail shopping experience has become more complicated and intertwined between Landlords, Tenants, Lenders and Consumers, so too has the use, scope and shape of “Co-Tenancy”. This is the first of two posts that will examine the ins and outs of the Co-Tenancy concept. We will examine: (1) the meaning of the term and its three generally recognized forms; and (2) key concerns Landlords and Tenants have with this animal.

The next post will examine what factors Landlords and Tenants need to examine in negotiating and dealing with Co-Tenancy throughout the life of retail shopping center in our post 2008 retail environment.  Is the fact that Landlords are developing, reconstructing and expanding retail centers with more  availability for financing lead to Tenants having more or less negotiating power to ask for strong Co-Tenancy rights ?  Does the effect of e-commerce and perhaps less demand for brick and mortar stores give Landlords more or less leverage to whittle down Tenant requests for strong rights and remedies?  Does the consolidation or expansion of certain retail sectors (clothing, home improvement, entertainment and groceries!) create new or different concerns for the parties?

But, we are getting ahead of ourselves….

1. The Co-Tenancy Provision

The concerns related to Co-Tenancy have been around in one form or another since Tenants started to conduct business in groups or clusters on real property owned by the same Landlord.  The key to the idea is that Tenants wanted the assurance the Landlord will populate the retail center with other businesses that would (or already were) operating to generate foot traffic and attention in order to create more business for them.  As Anchor Tenant centers and malls were developed, the concept began to find a more literal form as a key business point and ultimately a lease provision that provides rights and responsibilities to both Landlords and Tenants.

For smaller shop tenants, Co-Tenancy is important as a driver for activity in the center to increase new customers who were not coming to their store simply as a destination location.  For small, medium and large Anchor Tenants, Co-Tenancy is a leverage point to insure foot traffic at the center to add to their existing customer base.  In both cases, reduction of risk and increased profits are key.

2.  Types of Co-Tenancy Clauses

Transaction Contingency  –  More likely to show up in a LOI or other pre-lease document.  The idea here is that the Tenant’s obligation to execute the Lease is contingent upon the Landlord securing signed lease(s) with other tenants, most likely a key Anchor Tenant.

Opening Co-Tenancy – This clause creates a means by which a Tenant can delay the beginning of business operations until the required co-tenant(s) have also opened, thus reducing the risk that the Tenant begins business operations in a deserted center if there are delays in a large or Anchor tenant openings as well.

Operating Co-Tenancy – This type of clause requires that certain co-tenants remain operating or that a certain percentage of the retail center have operating tenants or the Tenant will have certain rights to stop paying rent or other lease charges, suspend operations or terminate the Lease Agreement.

3.   Basic Issues and Concerns for Landlords and Tenants

Regardless of the economic situation of the retail center or  otherwise, Landlords and Tenants will likely be concerned with several key terms in negotiating Co-Tenancy provisions, including:

  • Status of Anchor Tenant opening
  • Delays in construction of common area access points, parking lots, utility access, and common easements
  • Opening of Junior Anchors or other National or Regional Credit Tenants
  • Clarification of Replacement Tenants if large or Anchor Tenants cease business operations
  • Notification to Landlord by Tenant of Default in Co-Tenancy provisions
  • Cure periods for Landlords
  • Remedies for Tenants
  • Reimbursement Remedies
  • Reimbursement for amortized leasehold improvements.

NEXT:   Co-Tenancy issues in 2014-2015.

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