Definition
A Co-Tenancy Clause is a provision in a retail lease that allows a tenant to reduce rent, pay percentage rent only, or terminate the lease if certain conditions—typically the presence of anchor tenants or a minimum occupancy level— are not maintained in the shopping center.
In simple terms: if key stores close or occupancy drops too low, the tenant gets relief.
Why Co-Tenancy Exists
- Retail traffic often depends on anchor tenants.
- Smaller tenants rely on overall center vitality.
- Tenants want protection against declining foot traffic.
- Landlords use it as a leasing incentive.
Common Co-Tenancy Triggers
- Closure of a named anchor tenant.
- Failure to maintain a minimum number of anchor stores.
- Overall occupancy falling below a threshold (e.g., 70%).
- Failure to open within a required delivery period.
Common Tenant Remedies
- Rent Abatement: Temporary reduction of base rent.
- Percentage Rent Only: Tenant pays only percentage of sales.
- Termination Right: Tenant may terminate lease after a cure period.
Example
A clothing retailer leases space in a shopping center anchored by a grocery store and a major department store. The lease includes a co-tenancy clause requiring at least one anchor of 50,000+ SF to remain open. If both anchors close for more than 12 months, the tenant may:
- Pay reduced rent for a specified period.
- Terminate the lease if the condition is not cured.
Initial vs. Ongoing Co-Tenancy
Initial Co-Tenancy
Applies before tenant opens. If required anchors are not open, tenant may delay opening or avoid full rent.
Ongoing Co-Tenancy
Applies during the lease term if anchor or occupancy requirements are later violated.
Landlord Protections
- Substitution rights (replace closed anchor with similar tenant).
- Cure periods before remedies apply.
- Limit on duration of rent reduction.
- Cap on termination rights.
Impact on NOI and Valuation
- Rent reductions directly reduce NOI.
- High co-tenancy exposure increases risk perception.
- Lenders review co-tenancy clauses in underwriting.
- Anchor risk concentration can affect cap rate.
Underwriting Considerations
- Anchor tenant credit quality.
- Remaining lease term of anchors.
- Tenant concentration risk.
- Historical center occupancy trends.
- Substitution flexibility in leases.
Common Pitfalls
- Overly broad termination rights.
- No defined cure period.
- Ambiguous anchor replacement standards.
- Stacked co-tenancy exposure across multiple tenants.
Investor Checklist
- Review all co-tenancy clauses during due diligence.
- Model downside scenarios if anchors vacate.
- Assess lease rollover timing for anchors.
- Evaluate replacement flexibility provisions.
- Stress-test NOI under percentage-rent-only scenarios.
Co-Tenancy vs. Percentage Rent
- Co-Tenancy: Provides tenant protection if traffic drivers leave.
- Percentage Rent: Allows landlord to share in strong sales performance.