Make Replacement Tenant Definition Crystal Clear

Q: A prospective tenant for my shopping center wants its cotenancy clause to provide that a specific well-known retailer that takes up a large space in the center must be replaced with a “major tenant” if the retailer goes out of business. I assume this means a tenant that’s large enough to fill the entire square footage of the vacant space. I’ve been focusing on some other hotly contested issues during negotiations. Should I be concerned about this term?

A: Yes, it’s crucial to avoid ambiguity in cotenancy clauses. Very often, a tenant will demand that vacant space at a center must be filled with a tenant that’s not necessarily “identical” to the outgoing tenant, but has specific similar characteristics. If you don’t clearly define what those characteristics are, the tenant could argue that a replacement tenant you’ve found isn’t “similar” enough to the last tenant to qualify as an acceptable replacement.

You might envision a “major” tenant to be one that’s large in size in terms of required square footage. But your tenant might actually mean that the tenant is a national tenant, not a local or regional but large tenant. An undefined term in a cotenancy clause could lead to a dispute that allows the tenant to pay reduced rent, or ends up in court. For an example of a case on point about differing interpretations of a cotenancy clause, see “Clearly Defining Replacement Tenant in Cotenancy Clause,” available to subscribers here.