Place Another Limit on Tenant's Operating Cotenancy Clause

Recently, we gave you eight key points to address in an operating cotenancy clause. After reading “How to Limit Tenant's Operating Cotenancy Clause,” CLLI, Jan. 2002, p. 1, a CLLI subscriber, New Jersey attorney Steven A. Weisfeld, told us that there's another key point to address in that clause. That point is designed to protect you if a small (or “non-major”) store becomes an anchor (or “major”) store.

Protect Against Unintended Consequence of Desirable Change

In our article, we recommended saying in your operating cotenancy clause that a tenant could resort to its remedies if less than a minimum percentage of the center's gross leasable floor area was occupied by non-major stores. But you may have trouble meeting that minimum requirement if you give an expansion option to a non-major store, says Weisfeld. The non-major store might expand enough to qualify as a major store. After the expansion, the remaining non-major stores might not occupy enough of the leasable floor area to meet the minimum requirement.

Example: An operating cotenancy clause requires non-major stores to occupy a minimum of 50 percent of leasable floor area in your center. Currently, the non-major stores occupy 55 percent. During its lease, a non-major store exercises its expansion option for an additional space. Because of this expansion, the non-major store now occupies enough leasable floor area to classify it as a major store. The remaining non-major stores occupy only 45 percent of leasable floor area, which is below the clause's minimum requirement.

Although this expansion may have no effect—or even a positive effect—on the desirability and attractiveness of your center to customers, the tenant with the operating cotenancy clause could resort to its remedies. And that's something you probably didn't expect or intend.

Avoid Triggering Tenant's Remedies

There's a way to protect yourself in this situation, says Weisfeld. Say in the operating cotenancy clause that the tenant can't resort to its remedies if the leasable floor area occupied by non-major stores drops below the minimum requirement because a non-major store has expanded and become a major store, he says.

To do this, Weisfeld suggests adding the following language to your lease's operating cotenancy clause (the language assumes that the clause, like CLLI's Model Lease Clause, allows the payment of a lower “Alternative Rent” and, ultimately, lease termination, as the tenant's only remedies, and that the clause defines “Alternative Rent,” “Major Stores,” and “Non-Major Stores” elsewhere):

Model Lease Language

Notwithstanding anything to the contrary, Tenant shall not have any right to pay the Alternative Rent pursuant to Paragraph [insert #], hereof, or terminate the Lease pursuant to Paragraph [insert #], hereof, solely because a Non-Major Store has become a Major Store by virtue of an expansion during the Lease Term.

CLLI Source

Steven A. Weisfeld, Esq.: Beattie Padovano, LLC, 50 Chestnut Ridge Rd., PO Box 244, Montvale, NJ 07645-0244; (201) 573-1810.