A Tenant's Perspective on Co-Tenancy

While a tenant may be amenable to having a smaller anchor store satisfy the co-tenancy condition, a tenant should be careful when negotiating its co-tenancy
provision, so that the square footage of the replacement anchor tenant is addressed in such provision. Frequently, an anchor store occupying 80% of the square footage of the previous anchor tenant space will be deemed by the tenant to be satisfactory in order to satisfy the co-tenancy condition. If, however, the issue of the square footage of the replacement anchor tenant is not addressed in the co-tenancy provision, and the co-tenancy provision only centers on the number of anchor stores that must be open for business at the shopping center, a tenant may find that an anchor store occupying significantly less square footage than the previous anchor tenant may serve to satisfy the co-tenancy provision, (since the only definition that will need to be satisfied is the definition of an 'anchor' tenant in the lease). Often, the definition of an 'anchor' tenant in the lease will contain a square footage significantly smaller than the smallest anchor tenant operating at the shopping center. This is particularly important in shopping centers where there are very few anchor tenants, and a tenant may have expected that any replacement anchor tenant would be at least as large as the existing department store tenants.

Appropriate Replacement Tenants for an Anchor

All too often in negotiated co-tenancy provisions, a tenant accepts
language that simply provides that the square footage occupied by the anchor store must be leased and open for business in order to cure the co-tenancy provision. If this language is accepted by a tenant, a tenant may be surprised to learn that instead of replacing the anchor tenant with another anchor tenant, the landlord has leased the space previously occupied by an anchor store to numerous in-line tenants or has created a 'lifestyle' component to the shopping center that does not even face the interior mall of the shopping center or have an access to the interior of the shopping center. This issue is especially critical if the tenant is located immediately adjacent to the anchor tenant that has closed for business, and the tenant had depended on the anchor tenant to attract customers to its location prior to the anchor tenant's going 'dark.' Also, if the lifestyle area that is added to replace the anchor tenant contains a key competitor of the tenant, that competitor may be able to gain access to customers before the customers even enter the interior of the shopping center.

A tenant would be wise to indicate a certain number of anchor tenants that must be leased, occupied, and open for business at all times, in order to satisfy the co-tenancy provision. Further, a tenant should specifically address whether a mixed-use of in-line tenants or a lifestyle group of free-standing tenants will be deemed to satisfy the co-tenancy provision. Often, a compromise position would allow the landlord to replace the anchor tenant with a combination of: 1) a smaller anchor tenant, and 2) a mixed-use of tenants, so long as the anchor store remained adjacent to or in close proximity to the tenant in question; the anchor tenant maintained an entrance to the interior portion of the shopping center; the replacement anchor tenant and mixed-use of tenants occupy at least 80% of the floor area occupied by the former anchor tenant; and the mixed-use of tenants does not contain a direct competitor of the particular tenant.

Type of Replacement Anchor Tenant

It has become all too common in lease documents simply to address all anchor tenants in a generic manner. For instance, the definition of an anchor tenant may be a tenant that occupies at least 50,000 square feet in the shopping center. By utilizing this type of definition, an anchor tenant could be any of the following: 1) a discount retailer; 2) a military recruitment office; 3) a post office; 4) a fashion retailer; 5) an amalgamation of several small tenants all owned by one company; or 6) any other type of premises occupying at least 50,000 square feet. However, if the tenant were asked prior to executing the lease what it expected an anchor tenant to be, the tenant would most likely indicate that an anchor tenant was a full-service fashion retailer, comparable to the anchor tenants that were present at the shopping center at the time the tenant executed its lease.

Therefore, a tenant should be very careful in negotiating the definition of an 'anchor' tenant. In particular, a tenant should request that an anchor tenant be a store that contains at least a certain number of square feet (the definition of an anchor in terms of square footage will vary from location to location) of contiguous retail space occupied by a single tenant under a single trade name. By utilizing the above definition, a tenant can protect itself from an anchor's being a collection of smaller stores under separate trade names (but owned by one tenant) and also assure itself that the anchor store will be 'retail' in character (thereby eliminating post offices and military recruitment centers).

In addition, a tenant should pay special attention to the type of anchor store that is being used as the replacement anchor tenant. For instance, a tenant may want to indicate in the co-tenancy provision that an anchor tenant cannot be a discount retailer and must be a full-service fashion retailer. Also, a tenant may want to provide that the replacement anchor tenant is comparable in nature to the anchor tenant that it is replacing, including, but not limited to, similar price points, merchandise, quality, and frontage on the enclosed shopping center.

Careful drafting of the co-tenancy provisions relating to the types of qualifying replacement anchor tenants will help provide clarity as to when a landlord has effectively cured an 'anchor' tenant that has gone 'dark.'

Sample Co-Tenancy Clause

If at any time during the Term, (i) any presently existing or subsequently added anchor (or a retail replacement of comparable size, use, scope, quality and price points ('comparable anchor')) ceases to be open and operating for business in the Shopping Center, or (ii) less than eighty percent (80%) of the gross leasable area of the Shopping Center, excluding anchors, is open and operating; or (iii) the anchor store commonly known as '__________' ceases to be open and operating for business in the Shopping Center (or its comparable anchor replacement) (any of the aforesaid conditions being hereinafter referred to as an 'Operating Failure'), and provided Tenant is open and operating in the Premises to the extent required by the terms of this Lease and is not in default of this Lease beyond all applicable notice and cure periods, then in such event, notwithstanding anything to the contrary contained in the Lease, Tenant shall only be obligated to pay Landlord in lieu of Minimum Rent and Percentage Rent, an amount equal to ______ percent ( __%) of Gross Sales for each and every month during the period of such Operating Failure (the 'Substitute Rent'). Tenant shall pay the Substitute Rent monthly, in arrears, on or before the twentieth (20th) day of each calendar month, beginning on the twentieth (20th) day of the month following the month in which the Operating Failure occurs, and ending on the date the Operating Failure is cured, until the next Operating Failure occurs. In addition, if the Operating Failure occurs for twelve (12) consecutive months and the Operating Failure shall not have been cured during such twelve (12) consecutive month period, then Tenant shall have the right to terminate this Lease by written notice to Landlord at any time following said twelve (12) month period. The Lease shall terminate upon sixty (60) days written notice to Landlord. Landlord shall send Tenant notice (the 'Vitiating Notice') stating that a comparable anchor has actually replaced, taken occupancy of the space and opened for business in the space previously occupied by the anchor that previously closed for business, the name(s) of which shall be specified in the Vitiating Notice, and that eighty percent (80%) or more of the gross leasable area of the Shopping Center, excluding anchors, is leased and occupied; such that there are at least the following operating at the Shopping Center: (i) _____ ( __ ) anchor stores or their comparable anchor replacements; and (ii) eighty percent (80%) or more of the gross leasable area of the Shopping Center, excluding anchors; and (iii) the anchor store commonly knows as '________' or a comparable anchor replacement has opened for business in the Shopping Center. As of the date such Operating Failure no longer exists, Tenant shall once again be obligated to pay Minimum Rent and Percentage Rent as required under the Lease and the Lease shall not terminate unless and until the next Operating Failure occurs, in which event the Substitute Rent, conditions and time frames set forth above for an Operating Failure shall apply. An anchor store, for purposes of this Lease, shall be a tenant that occupies at least 50,000 contiguous square feet of space for a retail purpose under a single trade name. If a comparable anchor replaces an anchor, then notwithstanding anything contained herein to the contrary, the comparable anchor replacement must occupy at least the greater of: (i) 50,000 contiguous square feet; or (ii) eighty percent (80%) of the square footage occupied by the anchor that the comparable anchor is replacing.

In order to protect against a shopping center becoming less populated with retail department stores or so-called 'anchor' tenants, tenants will request, and frequently obtain, co-tenancy provisions in their lease documents. While the
co-tenancy provisions will vary from tenant to tenant, most co-tenancy provisions will at least protect the tenant from 'anchor' stores ceasing to operate (i.e., 'going dark') and from a certain percentage of 'in-line' tenants being closed for business. However, the co-tenancy provisions are often very vague as to how a landlord will be deemed to have cured a situation where an anchor store has closed for business. As a result, the following issues often are not addressed in the lease: 1) Does the entire anchor tenant space that has closed for business need to be leased and open for business in order to cure the co-tenancy condition; 2) Can the space previously occupied by the anchor tenant be occupied by a mixed-use of tenants in order to cure the co-tenancy condition; and 3) Are there any restrictions on the type of replacement anchor tenant that can open for business and cure the co-tenancy condition?

Amount of Space to Be Leased
To Cure a Co-tenancy Condition

On a very frequent basis these days, landlords are taking the position that not all of the space previously occupied by the original anchor tenant needs to be leased and open for business in order to cure a co-tenancy condition. Landlords are asserting the position that simply because a 200,000 square foot anchor tenant previously existed, such a footprint for a department store may be obsolete in current times, and an anchor tenant that occupies 150,000 square feet or less should serve to cure the co-tenancy condition.

While a tenant may be amenable to having a smaller anchor store satisfy the co-tenancy condition, a tenant should be careful when negotiating its co-tenancy
provision, so that the square footage of the replacement anchor tenant is addressed in such provision. Frequently, an anchor store occupying 80% of the square footage of the previous anchor tenant space will be deemed by the tenant to be satisfactory in order to satisfy the co-tenancy condition. If, however, the issue of the square footage of the replacement anchor tenant is not addressed in the co-tenancy provision, and the co-tenancy provision only centers on the number of anchor stores that must be open for business at the shopping center, a tenant may find that an anchor store occupying significantly less square footage than the previous anchor tenant may serve to satisfy the co-tenancy provision, (since the only definition that will need to be satisfied is the definition of an 'anchor' tenant in the lease). Often, the definition of an 'anchor' tenant in the lease will contain a square footage significantly smaller than the smallest anchor tenant operating at the shopping center. This is particularly important in shopping centers where there are very few anchor tenants, and a tenant may have expected that any replacement anchor tenant would be at least as large as the existing department store tenants.

Appropriate Replacement Tenants for an Anchor

All too often in negotiated co-tenancy provisions, a tenant accepts
language that simply provides that the square footage occupied by the anchor store must be leased and open for business in order to cure the co-tenancy provision. If this language is accepted by a tenant, a tenant may be surprised to learn that instead of replacing the anchor tenant with another anchor tenant, the landlord has leased the space previously occupied by an anchor store to numerous in-line tenants or has created a 'lifestyle' component to the shopping center that does not even face the interior mall of the shopping center or have an access to the interior of the shopping center. This issue is especially critical if the tenant is located immediately adjacent to the anchor tenant that has closed for business, and the tenant had depended on the anchor tenant to attract customers to its location prior to the anchor tenant's going 'dark.' Also, if the lifestyle area that is added to replace the anchor tenant contains a key competitor of the tenant, that competitor may be able to gain access to customers before the customers even enter the interior of the shopping center.

A tenant would be wise to indicate a certain number of anchor tenants that must be leased, occupied, and open for business at all times, in order to satisfy the co-tenancy provision. Further, a tenant should specifically address whether a mixed-use of in-line tenants or a lifestyle group of free-standing tenants will be deemed to satisfy the co-tenancy provision. Often, a compromise position would allow the landlord to replace the anchor tenant with a combination of: 1) a smaller anchor tenant, and 2) a mixed-use of tenants, so long as the anchor store remained adjacent to or in close proximity to the tenant in question; the anchor tenant maintained an entrance to the interior portion of the shopping center; the replacement anchor tenant and mixed-use of tenants occupy at least 80% of the floor area occupied by the former anchor tenant; and the mixed-use of tenants does not contain a direct competitor of the particular tenant.

Type of Replacement Anchor Tenant

It has become all too common in lease documents simply to address all anchor tenants in a generic manner. For instance, the definition of an anchor tenant may be a tenant that occupies at least 50,000 square feet in the shopping center. By utilizing this type of definition, an anchor tenant could be any of the following: 1) a discount retailer; 2) a military recruitment office; 3) a post office; 4) a fashion retailer; 5) an amalgamation of several small tenants all owned by one company; or 6) any other type of premises occupying at least 50,000 square feet. However, if the tenant were asked prior to executing the lease what it expected an anchor tenant to be, the tenant would most likely indicate that an anchor tenant was a full-service fashion retailer, comparable to the anchor tenants that were present at the shopping center at the time the tenant executed its lease.

Therefore, a tenant should be very careful in negotiating the definition of an 'anchor' tenant. In particular, a tenant should request that an anchor tenant be a store that contains at least a certain number of square feet (the definition of an anchor in terms of square footage will vary from location to location) of contiguous retail space occupied by a single tenant under a single trade name. By utilizing the above definition, a tenant can protect itself from an anchor's being a collection of smaller stores under separate trade names (but owned by one tenant) and also assure itself that the anchor store will be 'retail' in character (thereby eliminating post offices and military recruitment centers).

In addition, a tenant should pay special attention to the type of anchor store that is being used as the replacement anchor tenant. For instance, a tenant may want to indicate in the co-tenancy provision that an anchor tenant cannot be a discount retailer and must be a full-service fashion retailer. Also, a tenant may want to provide that the replacement anchor tenant is comparable in nature to the anchor tenant that it is replacing, including, but not limited to, similar price points, merchandise, quality, and frontage on the enclosed shopping center.

Careful drafting of the co-tenancy provisions relating to the types of qualifying replacement anchor tenants will help provide clarity as to when a landlord has effectively cured an 'anchor' tenant that has gone 'dark.'

Sample Co-Tenancy Clause

If at any time during the Term, (i) any presently existing or subsequently added anchor (or a retail replacement of comparable size, use, scope, quality and price points ('comparable anchor')) ceases to be open and operating for business in the Shopping Center, or (ii) less than eighty percent (80%) of the gross leasable area of the Shopping Center, excluding anchors, is open and operating; or (iii) the anchor store commonly known as '__________' ceases to be open and operating for business in the Shopping Center (or its comparable anchor replacement) (any of the aforesaid conditions being hereinafter referred to as an 'Operating Failure'), and provided Tenant is open and operating in the Premises to the extent required by the terms of this Lease and is not in default of this Lease beyond all applicable notice and cure periods, then in such event, notwithstanding anything to the contrary contained in the Lease, Tenant shall only be obligated to pay Landlord in lieu of Minimum Rent and Percentage Rent, an amount equal to ______ percent ( __%) of Gross Sales for each and every month during the period of such Operating Failure (the 'Substitute Rent'). Tenant shall pay the Substitute Rent monthly, in arrears, on or before the twentieth (20th) day of each calendar month, beginning on the twentieth (20th) day of the month following the month in which the Operating Failure occurs, and ending on the date the Operating Failure is cured, until the next Operating Failure occurs. In addition, if the Operating Failure occurs for twelve (12) consecutive months and the Operating Failure shall not have been cured during such twelve (12) consecutive month period, then Tenant shall have the right to terminate this Lease by written notice to Landlord at any time following said twelve (12) month period. The Lease shall terminate upon sixty (60) days written notice to Landlord. Landlord shall send Tenant notice (the 'Vitiating Notice') stating that a comparable anchor has actually replaced, taken occupancy of the space and opened for business in the space previously occupied by the anchor that previously closed for business, the name(s) of which shall be specified in the Vitiating Notice, and that eighty percent (80%) or more of the gross leasable area of the Shopping Center, excluding anchors, is leased and occupied; such that there are at least the following operating at the Shopping Center: (i) _____ ( __ ) anchor stores or their comparable anchor replacements; and (ii) eighty percent (80%) or more of the gross leasable area of the Shopping Center, excluding anchors; and (iii) the anchor store commonly knows as '________' or a comparable anchor replacement has opened for business in the Shopping Center. As of the date such Operating Failure no longer exists, Tenant shall once again be obligated to pay Minimum Rent and Percentage Rent as required under the Lease and the Lease shall not terminate unless and until the next Operating Failure occurs, in which event the Substitute Rent, conditions and time frames set forth above for an Operating Failure shall apply. An anchor store, for purposes of this Lease, shall be a tenant that occupies at least 50,000 contiguous square feet of space for a retail purpose under a single trade name. If a comparable anchor replaces an anchor, then notwithstanding anything contained herein to the contrary, the comparable anchor replacement must occupy at least the greater of: (i) 50,000 contiguous square feet; or (ii) eighty percent (80%) of the square footage occupied by the anchor that the comparable anchor is replacing.