Editor’s note: this is part of an NRTA series regarding tenants’ rights when a shopping center loses occupancy levels. The introduction can be found here.
Some larger business tenants are in a position to negotiate co-tenancy provisions in their leases. This way, if certain key stores or a percentage of stores in the center fail to operate, the tenant is entitled to relief. These provisions vary and should be closely considered – if you’re lucky enough to have one, you should be prepared to enforce them against your landlord.
How to Enforce a Co-Tenancy Provision
A typical co-tenancy provision states that if one or more key stores (or anchor stores) at a shopping center aren’t occupied by the existing tenant or a similar tenant, the tenant may pay reduced rent or terminate the lease. This can also apply if a certain percentage of the retail stores aren’t occupied by retail tenants. While co-tenancy provisions are generally enforceable, disputes may not be easy to resolve. Language in co-tenancy provisions can be ambiguous. There have been several lawsuits over the matter that were subject to a trial rather than a more efficient resolution by a judge.
A common problem with co-tenancy provisions is when and how co-tenancy rights are triggered. For example, does your landlord have an obligation to notify you when the co-tenancy requirements aren’t met or are you required to monitor the shopping center to confirm that it matches the requirements? This question is often determined by the specific lease language. For example, the lease may require the landlord to notify the tenant in the event of a co-tenancy failure. If the lease does not require notice, you should conduct your own inspection of the center and record occupancy levels.
“Making An Election”
Some provisions state that in the event of a co-tenancy failure, the tenant is entitled to “make an election” to pay reduced rent. How does that language affect your rights? When “making an election” of remedies because of a co-tenancy failure, the landlord will argue that the tenant’s failure to make the election after a co-tenancy failure removes the right to reduced rent or reimbursement of overpayments. While co-tenancy requirements are based on a certain percentage of leasable square footage, you may have trouble knowing precisely when a co-tenancy failure happens. In this case, you may need the landlord to provide additional data. You should be vigilant about monitoring the shopping center’s occupancy and compliance with co-tenancy requirements, but it’s the landlord’s obligation to provide the tenant with information relating to co-tenancy failure before the tenant is obligated to make an election of remedies.
Reduced Rent, or “Condition Precedent”
Other co-tenancy provisions may state that if the co-tenancy requirements aren’t met, then the tenant is not required to pay full rent. This language creates a “condition precedent.” If the condition (the co-tenancy requirement) is not met, the tenant’s rent obligations are reduced automatically. This language is preferable to the “election” language as described above. Where there is a condition precedent, if the tenant continues to pay full rent after a co-tenancy failure, the tenant has a stronger argument for reimbursement of prior overpayments.
For more information, contact the NRTA office at (413) 525-4565 or by filling out this form.