Set Limits on Retail Tenant’s Right to Terminate When Anchor Departs

Even before the pandemic, shopping center tenants were insisting on the right to terminate their lease in the event the anchor tenant leaves. Giving in to these demands may be unavoidable when tenants are a part of a national chain or otherwise enjoy negotiating leverage. But you should also impose reasonable restrictions so that an anchor’s departure doesn’t cause a mass exodus that turns your shopping center into a ghost town. Here’s a look at the restrictions you need, along with a Model Lease Clause: Limit Retail Tenant’s Right to Terminate If Anchor Tenant Leaves that you can use to implement them.

Be Selective About Which Tenants to Give Termination Rights

The loss of an anchor tenant and its power to draw traffic to the center hurts all tenants. But that doesn’t mean all tenants should get termination rights. In addition to lacking negotiating leverage, smaller retail tenants are typically less dependent on customers that an anchor attracts.

In general, you should grant termination rights to mid-sized retailers, especially if they’re part of a national chain—not just because of their leverage but their greater dependence on an anchor’s drawing power. After all, mid-sized tenants need the boost that anchors provide to help cover overhead, which includes not only rent, but also franchise fees and the costs of conforming store space, signs, and advertising to franchise standards.

SET 4 LIMITS ON TENANTS’ TERMINATION RIGHTS

When you do grant tenants the right to terminate after the loss of an anchor, be sure to limit those rights as much as possible. There are four key limits you should seek:

1. No Termination If Anchor Is Replaced

Give yourself a period of time to avoid triggering the tenant’s termination right by securing an equivalent replacement for the anchor. This is vital to the extent that the more mid-sized tenants who vacate the shopping center, the harder it will be to line up a replacement anchor. Whether tenants agree to this will largely depend on how much time you give yourself to find the replacement.

How much time should you get? Attorneys suggest asking for one year. Although that may sound like a long time, it’s also fairly realistic given the current state of the retail business. “Asking for 12 months to find an anchor tenant, negotiate a lease, finance the needed improvements, complete the construction, and get the tenant to move in and open is hardly unreasonable in this soft retail market,” notes one attorney.

In the not unlikely event that tenants object to giving you that much time, you could counter by trading additional time for rent breaks. One possibility would be to agree to reduce the tenant’s rent by the same percentage as the losses the tenant incurs due to the anchor’s departure. If possible, provide that rent concessions kick in only after the replacement window ends.

2. No Termination Unless Tenant Can Show Business Loss

Loss of an anchor tenant isn’t always catastrophic, especially when there are multiple anchors or a strong tenant mix to offset the losses. So, restrict tenants who get termination rights from using them unless and until they demonstrate the financial losses they actually incur as a result of the anchor’s departure. Financial losses may also be the result of a weak economy or the normal ups and downs of the business. Accordingly, tenants should be able to show two things to establish a causal link between their losses and the anchor’s departure:  

Losses are substantial: Make tenants demonstrate not simply that they’ve lost business but a substantial percentage of business, meaning at least 10 percent. Losses smaller than that are just as likely to be due to general economic conditions and would have occurred with or without the anchor, according to one leasing attorney in the retail industry. 

Losses occurred over a substantial period: Tenants should also be able to prove that they incurred their losses over a substantial period of time. Losses over a short period may be attributable to seasonal ups and downs, such as the normal drop in sales that occurs in the months after Christmas. That’s why you should try to negotiate a sample of at least one year, or nine months at the very minimum.  

3. Tenant Must Give Notice of Intent to Terminate

Require the tenant to give you written notice of its intent to exercise its termination rights, with termination to become effective no earlier than three months after you receive the notice. The longer the notice period, the more time you have to:

• Ensure the tenant’s space remains occupied;
• Find a replacement for the tenant; and
• Find a replacement for the anchor that may make the tenant willing to stay.

Leasing strategy: Our Model Lease Clause, below, includes what’s called a “second-chance” provision stating that the landlord’s election to terminate is cancelled if a replacement anchor tenant opens for business before the end of the termination notice period.

Example: The lease gives the tenant the right to terminate if the shopping center’s anchor leaves and the landlord doesn’t find a replacement anchor within one year. A year after the anchor moves out, the tenant sends the landlord written notice of its intention to exercise its termination rights, effective three months from the landlord’s receipt of the notice. Two months later, a replacement anchor opens up in the shopping center. The tenant’s termination election is cancelled.

Caveat: Don’t be surprised if tenants push back on second-chance rights.

4. No Termination Unless Both Anchors Leave

If there are two anchor tenants in your shopping center, termination rights shouldn’t trigger unless both of them leave, subject to the same time, replacement, notice, and other restrictions that apply to the loss of one anchor. Take the same approach when there are more than two anchors, but be prepared to compromise, for example, by agreeing to termination if two of three anchors leave.