Co-Tenancy Clause

A co-tenancy clause is a provision in a retail lease that gives a tenant the right to reduce rent, terminate the lease, or take other remedial action if a key anchor tenant or a specified percentage of other tenants in the same shopping center close, leave, or fail to operate. It protects smaller retailers from the economic damage caused by losing the foot traffic that drew them to the location in the first place. Think of it like a performance guarantee tied to the health of the surrounding tenant mix rather than the space itself.

Co-tenancy clauses appear almost exclusively in retail leases, particularly in shopping malls and strip centers where the success of individual stores depends heavily on the overall traffic generated by the entire center.

Why Co-Tenancy Clauses Exist

A smaller retailer often chooses a specific shopping center because an anchor tenant like Target, Walmart, or a major grocery chain drives consistent foot traffic to the area. If that anchor closes and foot traffic drops significantly, the smaller retailer's sales can fall to the point where the original rent is unsustainable. The co-tenancy clause addresses this reality by tying lease obligations to the conditions that made the location worth leasing in the first place.

Without a co-tenancy clause, a tenant is legally bound to pay full rent even if the center empties out around them. Major retail bankruptcies in the 2010s and 2020s brought co-tenancy clauses into sharp focus as dozens of anchor tenants closed locations across the country.

How Co-Tenancy Clauses Are Structured

No single standard format exists for co-tenancy clauses. Landlords and tenants negotiate their terms, and the specifics vary widely. However, most clauses address several common elements.

Trigger Conditions Define When the Clause Activates

The clause specifies which events activate the tenant's remedies. Common triggers include the closure of one or more named anchor tenants, occupancy in the center falling below a specified percentage (often 70% to 80%), or the anchor tenant failing to operate during normal business hours. The clause may require the anchor to be dark, meaning completely closed, for a minimum period, such as 60 or 90 consecutive days, before the trigger activates.

Remedies Determine What the Tenant Can Do

Once a trigger activates, the tenant typically has the right to:

• Pay a reduced rent, often called "co-tenancy rent," which may be a flat reduced amount or a percentage of gross sales
• Terminate the lease entirely if the trigger condition persists beyond a specified cure period
• Defer rent or withhold rent until the condition is remedied

Cure Periods Give the Landlord Time to Respond

Most co-tenancy clauses include a cure period during which the landlord can replace the anchor tenant or bring occupancy back above the threshold before the tenant's termination right activates. Cure periods are typically 12 to 24 months. During this window, the tenant may pay reduced rent but cannot yet exit the lease.

Negotiating a Co-Tenancy Clause

Tenants want broad triggers and easy exit rights. Landlords want narrow triggers, long cure periods, and rent obligations rather than termination rights.

As a tenant, you should push for:

• Named anchor tenants specifically listed as triggers rather than a general occupancy percentage, which is easier to dispute
• A short observation period before reduced rent kicks in, ideally 30 to 60 days after a trigger event
• A termination right that activates within 12 months if the landlord does not cure the condition
• Clear language on what "operating" means, because a store technically open but with reduced hours or inventory may not deliver the traffic you need

Co-Tenancy Clauses in Litigation

Disputes over co-tenancy clauses became common after the 2020 pandemic accelerated anchor closures. Courts have generally enforced co-tenancy clauses when the lease language is clear, though landlords have successfully challenged them when tenants failed to follow notice requirements exactly or when the anchor store partially remained open.

The lesson for tenants is that triggering a co-tenancy clause requires careful documentation and strict compliance with the notice and timing requirements written into the lease. Missing a notice deadline can waive your rights even if the underlying trigger clearly occurred.

Sources

• https://www.loopnet.com/learn/co-tenancy-clause/
• https://www.jdsupra.com/legalnews/