What is a Co-Tenancy Clause?
Last Updated on May 9, 2024 by Morgan Beard
As a retail tenant, it’s important to understand the various provisions in your lease agreement that can impact your business. One key clause to be aware of is the co-tenancy clause. This allows you, the tenant, to modify or potentially terminate your lease if certain conditions related to neighboring businesses are not met.
Defining Co-Tenancy
A co-tenancy clause stipulates that certain conditions must be met regarding the occupancy or leasing status of neighboring or anchor tenants within the same retail complex or building. This lease provision is common in retail real estate.
The purpose of a co-tenancy clause is to protect the interests of tenants, especially those who rely on the presence of specific anchor tenants or a certain level of foot traffic to drive their business. If the anchor tenants or other key retailers leave or the occupancy of the property decreases significantly, it could adversely affect the tenant’s business. The co-tenancy clause provides them with some recourse in such situations.
Co-Tenancy Clause Stipulations
Neighboring Businesses
The clause specifies which other tenants in the shopping center or development are considered key to driving customer traffic and sales for your store. This could include anchor tenants, big box retailers, major grocers or restaurants, etc. The continued operation of these draw tenants is seen as vital to the overall success and viability of your retail business in that location. Losing one or more of these neighbors can significantly impact your sales potential.
Occupancy Requirements
Some clauses require that the overall property maintains a minimum level of occupied rental space, such as 70% or 80% occupancy. If occupancy dips below this threshold, it triggers co-tenancy provisions. A high vacancy rate can create a ghost town atmosphere that repels shoppers. Maintaining a critical mass of operating businesses is crucial for generating foot traffic.
Restrictions on Competitors
The clause may prohibit your direct competitors from opening stores in the same property or mall, protecting you from increased competition in that location. This provides you with more breathing room to capture market share without being undercut on pricing or promotions. However, definitions of what constitutes a “direct competitor” can be complex.
Anchor Tenant Status
Frequently, co-tenancy rights hinge on whether the property’s anchor tenant (e.g. major department store) remains open and operating. Anchor tenants are the major draw for malls and outdoor lifestyle centers, driving as much as 60-80% of total customer visits and sales. Losing an anchor can drastically alter customer traffic patterns.
The Benefits for Retail Tenants
By including a well-crafted co-tenancy clause, retail tenants gain some valuable protections:
- Co-Branding Opportunities: Being surrounded by thriving nearby businesses with shared clientele creates opportunities for co-marketing, cross-promotions, and co-branding initiatives.
- Sustained Traffic Levels: You can ensure your business benefits from being situated amongst a thriving mix of complementary retailers and businesses that draw customers to the area.
- Flexibility: If major tenants leave or occupancy drops, you have the ability to renegotiate more favorable lease terms or terminate the lease without penalty.
- Avoiding Direct Competition: Provisions blocking competitors give you more breathing room to establish your niche and build your customer base.
- Protect Your Investment: A co-tenancy clause safeguards the expensive investments you’ve made in your retail space buildout, inventory, marketing, and staffing.
- Maintained Sales Volume: By ensuring your business operates in a vibrant retail environment, co-tenancy clauses help preserve your anticipated sales volumes and revenue streams.
- Leverage for Rent Reductions: Some clauses allow you to pay reduced rent if co-tenancy conditions are violated until the issues are resolved. An example of this is a rent abatement provision in which you the tenant are entitled to decreased rent payments.
- Early Termination Option: In more extreme cases of co-tenancy clause violations, you may have the ability to terminate your lease early with no penalties.
- Quality Control on Your Surroundings: These clauses give you some influence over the overall tenant mix and atmosphere of the retail property.
As a retail tenant, ensuring you have an appropriate co-tenancy clause is an important consideration that shouldn’t be overlooked when signing a retail lease. It can make a major difference in the long-term success and viability of your brick-and-mortar stores. Oftentimes, it does require understanding your Landlord’s perspective and employing the support of a real estate attorney to assist in lease negotiations.
To fully understand and leverage the co-tenancy language in your lease, many retailers rely on lease management software platforms like Occupier. These solutions help consolidate and track lease data, clauses, and critical dates to ensure you exercise your co-tenancy rights properly.
