Requiring ‘Department’ or ‘Specialty’ Store in Cotenancy Space Limits Your Choices

If you're negotiating a shopping center lease with a strong retail tenant, the tenant may demand an operating cotenancy clause. This clause typically says that if a particular department or specialty store currently in your center moves out, you must relet the space to another department or specialty store within a certain time. Otherwise, the tenant is entitled to certain remedies—such as the right to pay reduced rent, go dark, or terminate the lease.

In the past, cotenancy clauses didn't define the terms “department store” and “specialty store.” This wasn't a problem for either the owner or the tenant because only a few tenants could take such a large space in a shopping center.

But times have changed and so has the pool of tenants for large spaces. Many department and specialty stores have merged or gone out of business, leaving you with a much smaller pool of tenants in these categories, says San Francisco attorney Martin H. Orlick. And many stores no longer fit the traditional department or specialty store categories, but can lease a large amount of space—for example, a home improvement store. By promising to relet only to department or specialty stores, or similarly narrow categories of stores, you may be severely hindering your ability to find a replacement tenant for a large vacant space, Orlick warns.

Owner Hurt by Store Cate-gories in Cotenancy Clause

Orlick knows of an owner who recently got burned by a cotenancy clause that listed potential replacement anchors by narrow categories. The lease required that the center have no less than two “Department, Variety, or Specialty Stores” open and operating. But the lease didn't define those terms. When the original anchors moved out, the owner replaced them with a department store, a home improvement store, and a multiplex theater. But the tenant argued that the owner had violated the cotenancy clause because the home improvement store and multiplex theater weren't department, variety, or specialty stores. The parties wasted a lot of time and money on this dispute before eventually settling it out of court, notes Orlick.

Define Major Stores Broadly and by Size

Instead of promising in the lease to relet to another department or specialty store—or any other narrow category of store—simply agree to relet to one or more major stores, says Orlick. Define “major” stores broadly to include retail store and/or motion picture theater units, he says. Then add that each unit must be of a certain size—say, at least 35,000 square feet of leasable floor area, Orlick advises. This not only helps you avoid disputes with your tenant but also should give you more choices when picking a replacement tenant, he says. And the more choices you have, the more likely that you'll get a replacement quickly, before the tenant is entitled to a rent cut or some other remedy in the cotenancy clause, he adds.

Orlick suggests defining “major stores” in your cotenancy clause this way:

Model Lease Language

(x) “Major Stores” means retail store and/or motion picture theater units, each containing at least [insert #, e.g., 35,000] square feet of leasable floor area.

Practical Pointer: It's a good idea to keep each major store's square footage requirement as low as possible, says Orlick. That will make it easier to find a replacement tenant and give you the option of putting more than one big store in a space that was formerly occupied by an exceptionally large anchor, he explains.

How Will Tenant Respond?

Expect a savvy tenant to balk at your broad definition and demand that it set more limits on who can be a replacement tenant. For instance, the tenant may want to require that each major store:

• Be part of a nationally recognized chain;

• Not be a discount or off-price store (unless you're in an outlet mall); and

• Not sell products that would compete with its merchandise.

You'll have to negotiate with the tenant on these points, notes Orlick.

CLLI Source

Martin H. Orlick, Esq.: Partner, Jeffer Mangels Butler & Marmaro LLP, Two Embarcadero Ctr., 5th Fl., San Francisco, CA 94111-3824; (415) 398-8080.