THE ART OF DEFINING CO-TENANCY REPLACEMENT TENANTS IN RETAIL LEASES
The Art of Defining Co-Tenancy Replacement Tenants in Retail Leases
By: Gary Glick
Many large or credit-worthy retailers require a co-tenancy provision in their leases. For the most part, co-tenancy provisions provide retailers with certain remedies (such as, but not limited to, reduced rent and termination rights) if certain named retailers fail to open or remain open at a shopping center. Co-tenancy provisions will also usually reference a percentage of the gross leasable area in the shopping center that must be open and operating, failing which, the retailer will have the remedies set forth above.
When a co-tenancy provision identifies a particular retailer, it is critical that landlords give themselves the right to replace named co-tenants with other similar (or dissimilar, as stated below) tenants so as not to give the tenant with the co-tenancy provision the right to pay reduced rent or terminate its lease if the co-tenant ceases operations. For example, if a named co-tenant goes dark or terminates its lease, the landlord should have the right for a period of six months (or longer, if the reason for the go dark or termination relates to a casualty) to replace such named co-tenant with (a) a reasonably comparable retailer in all or substantially all of such named co-tenant’s space, (b) another comparable retailer of other space in the shopping center, (c) two or more retailers that together occupy space reasonably comparable to the named co-tenant, or (d) a retailer operating for a completely different use than the named co-tenant so long as such replacement retailer is a reasonably comparable draw to the shopping center as the named co-tenant.
In today’s changing retail landscape, especially in connection with anchor retailers at regional malls, it is important to consider that a department store may not be replaceable with another department store due to the ever shrinking number of department stores. In addition, even if the landlord can find a replacement department store in a regional mall context, it may make more sense to replace the department store with a completely re-tenanted building. For instance, a department store that has not kept pace with the current retail climate may be better replaced with a theatre and numerous restaurants, a high-end bowling alley and restaurants, or a multi-family use with retail on the ground floor. The concern of the retailer possessing the co-tenancy clause in its lease should be that the use generates a comparable number of trips to the regional mall by a demographic that is similar to or better than that generated by the co-tenant being replaced.
The following is a sample replacement co-tenancy provision for use in a regional mall:
For purposes of the Initial Occupancy Conditions, the term ‘equivalent replacement’ shall mean one (1) tenant or occupant or an aggregate of two (2) tenants or occupants, each of whom operates at least ten (10) other stores as of the date such tenant or occupant will occupy the applicable premises; provided, if any such tenant or occupant does not operate at least ten (10) other stores, then such tenant or occupant shall be subject to Tenant’s prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed. For purposes of the Subsequent Low Occupancy Condition, the term "equivalent replacement" shall mean one (1) tenant or occupant or an aggregate of multiple tenants or occupants, each of whom singly or in combination with the other, will draw patrons or customers to the Shopping Center in comparable levels as other comparable first-class shopping centers in the _________________, California area. For avoidance of doubt, multiple tenants satisfying the requirement set forth in the preceding sentence that, in the aggregate, occupy at least seventy percent (70%) of the applicable premises of one of the retailers listed under clause (a) above shall be deemed collectively as an "equivalent replacement" for purposes of this paragraph.
As indicated above, it is imperative that landlords, when negotiating co-tenancy provisions, give themselves the flexibility to replace named co-tenants with a variety of different tenants and uses to avoid the draconian remedies available to the retailer whose lease contains the co-tenancy provision.