Strategies for Retail Landlords To Mitigate Cotenancy Risks

Cotenancy provisions grant rights and remedies to tenants when certain requirements are not satisfied by their landlords or other tenants in a shopping center. Many such rights and remedies in retail leases were triggered during the “Great Recession,” when consumer spending weakened and vacancies rose. This had a devastating domino effect on some retail landlords, because the termination of one lease triggered remedies under other leases, such as termination rights and reduced rent. Many properties became subject to receivership, foreclosure and forced sales at distressed prices, partly as a result of these remedies being exercised. Retail landlords must learn from these experiences and utilize that knowledge in negotiating and drafting cotenancy provisions in future leases.

Cotenancy Provisions

Cotenancy provisions condition a retailer’s obligation to commence construction, open and/or remain open for business upon the execution of other leases, the commencement of construction, opening for business and/or the continued operation of other tenants’ businesses (i.e., “cotenants”). Opening cotenancy provisions are often contained in leases for premises in shopping centers being developed, renovated or redeveloped. These clauses may require that common areas and infrastructure improvements be completed, and that a certain minimum percentage (e.g., 65-85 percent) of the rest of the shopping center be leased to cotenants. It may also require that certain identified cotenants sign leases and be open for business, to assure protected retailers that shopping centers will be operating at sufficient capacity. Insufficient foot traffic because of low occupancy generally results in lower sales than anticipated. Landlords prefer not to provide cotenancy protections because they may jeopardize cash flow, the ability to obtain financing, the value of the real estate and, ultimately, the success of the shopping center. However, landlords often agree to grant cotenancy protections because they are required to do so as a condition of attracting tenants with strong credit, including national retailers.

Cotenancy Percentage Formulas