Monday, March 2, 2009

More on co-tenancy clauses

I alluded to co-tenancy clauses in leases a few months ago in the context of Sears, but I am going to bring it up again after reading this story raising yet more about the topic.

For you newbies and novices, here's the scoop. A tenant with leverage-- be they big boxes, national retailers with pull or other credit tenants -- will ask for (and, in this market, get) a clause in its lease giving it the option to terminate the lease if a certain tenant (or tenants) in the shopping center terminates its lease or goes dark (i.e., closes while paying rent). Example: if Circuit City goes bankrupt in a shopping center with other tenants that have a co-tenancy clause for CC, those tenants now have the right to walk form their leases. All of a sudden your leased-up center is half-empty. Some tenants also negotiate a right to walk if retail sales do not reach a certain level.

Anyway, you get the picture: a vicious cycle, or at least a spiral. That is why, as the story say, you could see why some landlords may have additional strain or worse. I do not want to get into my own strategies for dealing with these issues, but they are certainly something a careful lawyer considers on day one of the letter of intent.


Steve Dykes said...

To add fuel to that fire, there is now a software/service that alerts Retailers when one of their "Co-tenants" leaves a center.