The retail apocalypse began long before COVID-19 . With many retailers already over-leveraged and shopping patterns changing, retailers were already shuttering stores, seeking a reduction in rent and/or filing bankruptcy. Afterall, many major retailers including anchor tenants like Sears, had already filed bankruptcy. COVID-19 has merely sped up the process.
That said, when an anchor department store closes and/or files bankruptcy and/or several major retailers in a shopping center close and/or file bankruptcy, the effect is a trickle down to the remaining tenants, which adversely affects their revenues and their ability to survive.
Now more than ever, co-tenancy clauses can make or break a retail tenant. Co-tenancy clauses permit rent reductions or even the ability to terminate the lease if certain tenants located in the same mall or shopping center close or leave and a percentage of the overall space is not occupied.
More often than not, the anchor tenants will have more leverage in negotiating co-tenancy clauses, but, as we have seen, these clauses are and will become all the more important for any tenants negotiating retail space.
There are typically two types of co-tenancy clauses. The first type is sometimes referred to as an opening co-tenancy clause which is often applicable when a mall or shopping center is new or being renovated. There, the tenant does not have to open and pay full rent until certain other stores are open and/or a percentage of the overall space is occupied. The second type is sometimes referred to as an operating co-tenancy clause and it applies in existing malls or shopping centers. There tenants are permitted to reduced rent or to cease if a specified number of tenants close and are not replaced with a suitable tenant or tenants.
Reduction or Termination of Rent
There are also certain prohibited use or anti-competitive provisions that allow for a reduction of rent or termination. For instance, some tenants will negotiate such prohibited uses as CBD, marijuana dispensaries, massage parlors, nightclubs, and strip clubs. After all, it is important for some retailers to ensure the quality and standards of the mall and shopping center are upheld so that the tenants have a quality shared experience. In difficult times, a mall or shopping center may be more inclined to rent to anyone, especially if they have loan covenants that require a specified percentage of the mall or shopping center be leased.
Often, customers do not want to walk long distances or hunt for parking in shopping centers.
A small tenant may want to negotiate a provision regarding available parking spaces, since certain tenants such as grocery stores or movie theatres require heavy use of parking.
Other tenants may want to negotiate anti-competitive provisions prohibiting leases to retailers that could be deemed competitive. These co-tenancy and related clauses are important and designed to ensure the mall or shopping center upholds and maintains its quality standards so that patrons enjoy a good experience while visiting.
In this ever-changing landscape, issues arise as to what constitutes a suitable replacement tenant. Is a movie theatre or a grocery store a suitable replacement tenant for an anchor department store? Does a discount retailer constitute a suitable replacement for a high-end retailer ? The result of changes like these could prompt the need for current/smaller tenants to revisit their agreements – and to anticipate these situations when entering into new lease agreements.
In some instances, tenants with co-tenancy clauses will request a rent reduction or other monetary or non-monetary benefits, which may not cost the landlord as much from an after-tax standpoint. For instance, the landlord may be more amenable to provide money to improve/update the premises or permit additional usage of the premises that may have been a prohibited use. This is assuming that the additional use does not violate an anti-competitive provision in another lease. In other instances, the landlord may permit the tenant to reduce the number of hours it would be required to stay open. And then, there is the ultimate demand: to terminate the lease.
In summary, these times require creativity. Both landlords and tenants want to succeed. Thus, at the end of the day, it is important when negotiating the lease, and then seeking enforcement of the lease, that both sides should view these co-tenancy clauses and other related clauses as an attempt to seek a win-win situation when unfortunate circumstances occur.