A co-tenancy clause refers to a provision in a retail lease contract that permits tenants to reduce their amount of rent if a number of tenants leave the rental space. Some tenants are known to attract more traffic, especially in malls. It is the reason why some tenants may decide to have their businesses in this location. So, if this key tenant happens to vacate the mall, there will be no traffic anymore.
What does this mean? It means that other tenants will not get the number of customers as they used to while this key tenant was around. A co-tenancy clause, therefore, comes in to protect tenants from such a scenario It does this by cutting down the amount of rent the tenants should pay as a move to compensate them for the loss of traffic.
A Little More on What is a Co-Tenancy Clause
In any mall, co-tenants are usually the anchor tenants. They are the biggest, and they own popular stores that tend to draw traffic that trickles over to other stores in a similar location. However, during economic stress, retailers are usually forced to close some of their outlet stores. They do this so that they can reduce costs, and as a result, landlords lose a lot of revenue.
So, when the remaining tenants demand a reduction in rent as per the co-tenancy clause, it leads to further loss of revenue by the landlords. It may even eventually lead to bankruptcy.
However, the co-tenancy clause is beneficial to the tenants as it provides protection. It ensures that the shopping malls continue to be operational and able to draw customer traffic so that the tenants benefit from the sales.
Why Landlords Avoid Co-Tenancy Clause
There is fiercely negotiation when it comes to the co-tenancy clause. Most landlords do not like the provisions in this clause because it is difficult for them to control other tenants’ or occupants’ decision to move out of the shopping mall. The landlords see this clause as something that can severely affect their revenue.
For tenants to obtain a co-tenancy clause, it will depend largely on their power to negotiate. For instance, landlords will always be on the lookout for tenants with big names. They also look for tenants who are capable of paying a high amount of rent, and their power to stay for long. Such tenants are likable because they have the capacity to draw a massive population in a business location. Such tenants can easily negotiate for co-tenancy protection as they are in a better position to engage a landlord in the negotiations.
Landlords who consider using a co-tenancy clause risks losing significant revenue in the process. It is important, therefore, for the tenant to ensure that the drafting of the co-tenancy is properly done to help minimize the risks. Involving an attorney with experience in finance law and commercial real estate can be a good move in achieving this.
The Landlord’s Conditions for Co-Tenancy Clauses
To be able to obtain a co-tenancy clause, a landlord will demand that the tenant meets certain conditions. The most crucial condition in this clause is that the tenant cannot default on the lease. Note that breaching the co-tenancy clause may lead to lease termination.
The Basics of Co-Tenancy Clause
The co-tenancy clause is most popular among the shopping center tenants as well as mall leases. It has the ability to reduce rent or terminate the lease, when other tenants stop their operation in the facility, leaving large space unoccupied. The co-tenancy clause is commonly used by large store owners, which they use to negotiate and ensure that there is enough protection.
Types of Co-Tenancy Clause
The co-tenancy clause exists in two types. They as follows:
- Opening Co-Tenancy Agreements: This one is most common where new malls or shopping center developments are involved. It also happens in a state where tenants don’t open and pay rent in full, not until other stores are open and a certain percentage of the space in the mall is occupied.
- Operating co-tenancy agreements: This one applies to those malls and shopping centers that are already in operation. It allows tenants to pay rent at a reduced rate or stop their operations completely if the specified tenants vacate, and there are no suitable tenants to replace.
Generally, stores in an environment where there is sharing, rely on each other to draw traffic. They are also expected to uphold specific standards as well as maintaining patron’s good experience. For instance, the clause may specify the prohibition of certain uses such as:
- Marijuana dispensaries
- Massage parlors
- Nightclubs and strip clubs
Also, there is prohibiting or limiting the percentage of other non-retail uses such as fitness centers and grocery stores. A good example is the limiting or prohibiting of heavy parking. Note that all these can be possible through a co-tenancy clause, including other related lease clauses created for this purpose.