Co-Tenancy Clauses Coming Back to Bite Shopping Center Owners

As retail chains across the country are closing out their unprofitable stores, it is causing significant collateral damage to the centers and the landlords left holding the bag due to the co-tenancy clauses frequently found in leases for retail stores in shopping centers. Typically, a co-tenancy clause in a lease would entitle the lessee/retail store to a rent reduction or, more commonly, would allow the store to break its lease and relocate without penalty when a major anchor tenant leaves or if the total occupancy of the center falls below a specified percentage for a period of time.

Given the current economic climate, which has heavily impacted the retail industry, many retail chains are closing out their unprofitable locations and/or filing for bankruptcy protection. The International Council of Shopping Centers estimates that 73,000 stores may close through the first 6 months of 2009. If the ICSC's estimate is accurate, and other retail stores exercise their right to cancel their lease or a steep rent reduction, then shopping center owners are facing an ugly year.

In today's market, the retail store tenants are holding most of the chips and nearly all require some sort of co-tenancy clause in their lease as a condition to leasing a new location. It has become one of the most critical issues in retail lease negotiations. With good tenants hard to come by, shopping center owners have no choice but to accept a co-tenancy clause. For an owner, not being able to avoid the co-tenancy clause altogether, the best recourse is to try and negotiate a reasonably period of time in which to look for a replacement anchor tenant prior to any lease cancellation right taking effect.

(For more information: click here for "Co-tenancy Clauses Push Shopping Center Owners Toward Bankruptcy" by Denise Kallette on; and click here for "Holiday Sales Drop to Force Bankruptcies, Closings" by Heather Burke on; and here for "Retailers' loss of revenue hammers city and state budgets" by Jayne O'Donnell on )

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