Negotiate Narrow Cotenancy Remedies for Tenant

If you signed a lease with an operating cotenancy clause, you may feel that you’re under pressure to keep the status quo at your center or pay the price by allowing the tenant with a cotenancy right to pay reduced rent or take advantage of other concessions if one or more other tenants close or go dark during the lease term and aren’t replaced within a designated period of time. But you don’t have to give a tenant unfettered remedies if that scenario arises. If you have to grant your tenant’s request to include an operating cotenancy clause for the deal to go through, make sure you draft the lease in such a way that allows you to control any remedies that you agree to. When negotiating your cotenancy clause leases, use the following eight strategies, which will allow you to effectively limit your tenants’ access to remedies in the event that specific stores go dark in your center. Like our Model Lease Clause: Limit Cotenant Remedies When Stores Go Dark, yours should give up as little as possible in case the tenant has the option to exercise that right.

Strategy #1: Expand Type of Acceptable Replacements

In most leases, the cotenancy clause is triggered if a specified number of “major stores,” or “non-major stores” that make up a significant portion of your center are inoperable for a predetermined amount of time. However, if you find suitable replacements within the predetermined time, you won’t be in violation of the lease agreement and the tenant can’t utilize any of the remedies offered in the cotenancy clause.

To avoid triggering the cotenancy clause, make it easier to find replacement tenants by using a very broad definition of “major and non-major stores,” in your lease agreement. By avoiding specifics, you’ll give yourself more options when looking for replacements.

Broaden the definition of “major and non-major” stores by using only size as a gauge. For instance, refer to “major store” in the lease as any “retail store containing at least 20,000 square feet of leasable floor area,” and “non-major store” as any “retail store containing less than 20,000 square feet of leasable floor area” [Clause, par. a]. It’s important to be conservative when stating the size requirement in the lease; the lower the figure, the better your chances for finding a replacement.

Keep in mind that most tenants will want you to be more specific with your definitions. If negotiations call for flexibility on this issue, stick with the rule of using size as a gauge, but agree to include numerous types of stores in your definition. For example, expand the definition of “major store” to include “any anchor tenant, or specialty store or department store containing at least 20,000 square feet of leasable floor area.” The key here is to make the tenant comfortable while keeping as many of your options open as possible.

Strategy #2: Offer Rent Abatement

Tenants often find that, once their business is established, the closing of what they considered a vital cotenant turns out not to be all that detrimental to their business. Therefore, there is little reason to let the tenant terminate its lease in the event a cotenancy failure occurs. (After all, the purpose behind a cotenancy right is to help surround the tenant with other businesses that make it thrive.) Instead, offer a much more favorable option for you such as some form of rent abatement. For example, to keep the tenant up and running, you could offer to either let the tenant pay a set percentage of its gross sales until you find a replacement, or you could have the tenant pay minimum rent. This will help you avoid a potential domino effect on the center’s tenancy rate after a large tenant closes. Another way to limit the tenant is to include in the remedies language regarding payment of percentage rent a requirement that the tenant prove that a reduction in gross sales was directly caused by the cotenancy violation.

Strategy #3: Set Conditions for Rent Abatement

Make the tenant meet specific conditions before it can take advantage of and maintain the rent abatement. For instance, make the receipt and continuous use of the rent abatement contingent upon the tenant’s continuing to conduct business in good faith (that is, remaining open and fully staffed and stocked) during the entire cotenancy violation period [Clause, par. d].

Strategy #4: Limit Rent-Abatement Period

Don’t agree to let the tenant pay abated rent on a long-term basis. Instead, set a specific time frame and agree that if you are unable to cure the cotenancy violation in that specific time frame, the tenant must either terminate the lease or go back to paying full rent [Clause, par. b].

If the tenant chooses to terminate the lease, require prior written notice of termination and set a firm end-of-lease date (for example, 120 days after receipt of notice). Also, include language that eliminates the tenant’s right to terminate and requires it to resume paying full rent if the cotenancy violation is cured—that is, you find a new suitable tenant—before the 120-day period expires [Clause, pars. e, f], or if the tenant doesn’t provide proper notice of termination.

In addition, your lease should state that if the tenant attempts to exercise any expansion, renewal, or extension options while it’s receiving the rent abatement, the rent abatement will be terminated [Clause, par. g]. Exercising those options indicates that the cotenancy violation isn’t really hurting the tenant; a suffering tenant wouldn’t want to lock itself further into doing business at the center.

Strategy #5: Require Monthly Gross Sales Report

When the tenant pays you the abated rent every month, require it to attach a monthly gross sales statement [Clause, par. c]. This document will allow you to ensure that you are receiving accurate rent payments.

Strategy #6: Exempt Temporary Closings

When you negotiate the terms of the cotenancy clause, it’s crucial to make it clear that temporary closings—shutting down to deal with damage from storms, health emergencies, remodeling, and so on—don’t trigger the clause [Clause, pars. a(iii) & b]. Otherwise, you’ll have to go through the headache of granting remedies for a short-term situation.

However, be aware that most tenants will want you to place a limit on the amount of time that a temporary closing can last. If possible, avoid committing to a number, as it might be difficult to accurately gauge the potential external factors that could come into play.

Strategy #7: Require Ongoing Payment of CAM, Other Costs

If the tenant exercises its rights under the cotenancy clause, regardless of the remedy, make sure that it continues to pay its share of CAM costs and any other costs that it promised to in the lease [Clause, par. c].

Strategy #8: Limit Remedies to Those in Clause

Don’t allow the tenant to use remedies for cotenancy violations that are not offered by the specific, negotiated cotenancy clause [Clause, pars. b, e]. Be sure that the lease language clearly limits the remedies to exactly what you and the tenant agreed to during negotiations. If you don’t, the tenant could combine other lease clauses to strengthen its claims against you.