/>iWhy Co-Tenancy Clauses Matter Now More Than Ever
In the ever-morphing world of Retail Leasing, co-tenancy clauses often become the focus of negotiation—and a frequent flashpoint of disputes. Designed to protect tenants from being left vulnerable when shopping centers lose key retailers, these lease provisions can make or break a deal.
What Are Co-Tenancy Clauses, Really?
At its core, a co-tenancy clause is a provision in a retail lease that ties the lease obligations of the tenant—typically rent payments or continued occupancy—to the presence and performance of other tenants in a retail center. If certain conditions aren’t met, tenants may be entitled to pay less rent, shift to an alternative rent structure (i.e., a percentage model), or even walk away from the lease altogether.
The Three “Flavors” of Co-Tenancy
1. Opening Co-Tenancy
This provision states that tenants neither have to open nor pay full rent until a certain number of other tenants (often anchors) have also opened. This is common in developing centers or during major renovations. This provides assurance to the tenants that the shopping center will be sufficiently occupied to ensure foot traffic and potential sales before committing to opening the store.
2. Operating Co-Tenancy
Under this provision, once a tenant is opened and operating, they may be allowed to adjust rent or exit if the center loses key tenants after opening. This is to protect the tenants from operating in centers with insufficient foot traffic, or “ghost centers.”
3. Delivery Co-Tenancy
This type of clause refers to an occupancy condition that must be met before a tenant takes possession of the leased premises. Specifically, tenants want proof that the center will have enough open stores to attract shoppers. Clauses like these are usually contingent on construction timelines or lease signing with other tenants.
Why It Matters More Than Ever
The traditional purpose of co-tenancy was to protect tenants from being stranded in “ghost centers,” after the closing of key anchors. However, the retail landscape of today is far more fluid, and as such, co-tenancy clauses—and the way we structure them—need to evolve. Many legacy anchors are downsizing, being replaced by nontraditional uses, or being redeveloped altogether. Foot traffic these days is also driven by more factors than just square footage.
As this shift continues, it’s no longer enough to simply have a few “big-name” tenants in a lease. Clauses need to define what a “material failure” looks like and ensure that lease remedies reflect an actual disruption in business.
Five Tips for Drafting Stronger Co-Tenancy Clauses
1. Be Precise
It cannot be overstated how essential precision is in drafting these clauses. Avoid ambiguous terms like “comparable tenant mix” or “similar retail profile.” Specify anchor tenants by name, clearly define minimum square footage, include hours of operation requirements, and address what constitutes a “replacement” tenant. Clear and measurable terms make clauses more affordable and less likely to spark disputes.
2. Add Realistic Cure Periods
A well-structured clause should include a cure period—commonly 60 to 180 days—before any remedy is triggered. This gives landlords a window to rectify the issue, re-lease, or adjust before tenants start pulling back.
3. Link Remedies to Sales Impact
Consider requiring proof of declining sales (for example, 20% over 12 months) before tenants can claim rent relief or termination rights, ensuring that remedies are based on real-world effects.
4. Using Tiered Remedies
Instead of jumping straight to immediate or indefinite rent abatement, structure remedies in stages.
- First, switch to a percentage rent model
- Then, offer a temporary rent reduction
- Allow lease termination only after prolonged failure and notice
This approach aligns incentives and gives both parties time to course-correct.
5. Carve Out Exceptions In the Form of Non-Curable Events
Include exceptions for closures due to events outside of the landlord’s control, such as natural disasters, bankruptcy, or redevelopment. Negotiating these issues up front can help avoid disputes down the road.
The Attorney’s Role: Balance, Not Bias
Because attorneys on both sides of the table are tasked simultaneously with protecting a client’s interests and drafting agreements that can stand up to scrutiny and the realities of the market, it’s paramount to approach negotiations with the right mindset: collaboration over confrontation. The goal is not to “win,” but to create a structure that works for both sides over time.
Tough questions need to be asked:
- What occupancy levels truly affect business?
- Can proof of impact be built in?
- Are cure periods realistic?
When both sides work from a place of clarity and intent, deals not only close but also last.
Final Thoughts: Partnership Through Precision
Co-tenancy clauses aren’t just for tenant protection—they’re critical risk-sharing mechanisms that require legal sophistication. With clear terms, fair triggers, and reasonable remedies, attorneys can structure clauses that protect tenants, support landlords, and promote business continuity. It all comes down to precision. The best co-tenancy provisions are not the most aggressive—they are the most clearly defined, reasonably limited, and operationally realistic.
