What is a Co-Tenancy Provision?...5/18/2016 3 • Execution Co-Tenancy: – Before the center is built the Landlord must show a certain amount of leases have been executed. This can

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Win-Win Co-Tenancy Provisions for

Landlords and Tenants

Chris Ressa

Sr. VP of Leasing, Northeast & Midwest

Table of ContentsI. Co-Tenancy Definitions

II. Co-Tenancy Purpose

III. How does a Co-Tenancy Failure Occur?

IV. How is a Co-Tenancy Enforced?

V. How are the Landlord & Tenant Protected?

VI. How is the Co-Tenancy Cured?

VII. Case Studies

VIII.Solutions for the Future

What is a Co-Tenancy Provision?

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I. Co-Tenancy Definitions

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The term “co-tenancy clause” refers to one or more clauses in a typical shopping

center lease that conditions a tenant’s obligation to start construction, open and

operate its store upon the commencement of construction, opening and/or continued

operation of other specified “co-tenants” in the shopping center.


Two (2) primary types of Co-Tenancy

• Named Co-Tenancy– Specifies tenants that need to be open

and operating.

• Occupancy Threshold– Specifies a minimum percentage of the

center’s gross leasable area that must be leased.

Example A:

• TJ Maxx must be open and operating or a Co-Tenancy failure shall be deemed to have occured.


Example B:

The center must be at least 70% occupied or a co-tenancy failure shall be

deemed to have occurred.


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• Execution Co-Tenancy: – Before the center is built the Landlord must

show a certain amount of leases have been executed. This can lead to delays for the Landlord, as penalties and delays might come before the project gets off the ground even if it is going well. However, this provision gives a tenant assurances the center will be built.

• Delivery Co-Tenancy:– This is similar to execution co-tenancy,

however, it requires that the Landlord has delivered space to tenants and construction has started when the lessee’s space is delivered. Similar problems can occur for landlords, as with the execution co-tenancy. Again, this is an important provision because most tenants don’t want to be the only ones under construction and opened.

Stages of Co-Tenancy


• Opening Co-Tenancy– This provision requires a certain percentage

of tenants to be open or certain named Tenants to be open before lessee opens. landlords want tenants to open regardless. If multiple tenants have opening co-tenancy provisions it could set off a domino effect that could impact financials and delay the project. Tenants want assurance they are not the only ones open in a shopping center.

• Operating Co-Tenancy– This provision is what most people think of

when they think of co-tenancy. It is the provision that states certain tenants or certain percentage/number of tenants are open and operating throughout the term of the lease.

Stages of Co-Tenancy cont’d


Some Key Points of

Consideration:

• What constitutes a Co-Tenancy

failure?

• How does the failure get enforced?

• What are the penalties/damages?

• How does the Landlord cure the Co-

Tenancy failure?

Hmmm…


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Crafting a fair clause that clearly defines a failure

Let’s do this together


Leverage, Fairness, Protection, & Committees


• Balanced merchandising mix

• Protection for the tenant

• Non-punitive action for the

Landlord

• What else?

What are we trying to accomplish?


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When is Co-Tenancy a deal breaker for the Landlord?


• Potential Lender issues

• Landlord doesn’t “need” the deal – Occupancy is high

– Tenant demand is high

• Cost risks

• Partner issues

• Terms of Co-Tenancy do not work ******

• What else?

Landlord Deal Breaker Cont’d


When is Co-Tenancy a deal breaker for the Tenant?


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• Terms of Co-Tenancy do not work *****

• Committee requires something no matter what

• Tenant has multiple options in a market

• What else?

Tenant Deal Breaker Cont’d


Time to Create an Anchor or Named on-going Co-Tenancy Provision

III. How does a Co-Tenancy Failure Happen?

“Landlord agrees that after the delivery date Shop-Rite, Christmas Tree Shops, Bob’s

Furniture, Ashley Furniture, Burlington Stores, K-Mart, and Hobby Lobby shall remain

open and operating or a Co-Tenancy failure shall be deemed to have occurred.”

Why won’t this work for the

Landlord?

A Strong Tenant PerspectiveIII. How does a Co-Tenancy Failure Happen?

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There has to be a better way to satisfy both

party’s concerns

III. How does a Co-Tenancy failure Happen?

“Landlord agrees that after the rent

commencement date that four (4) of the

seven (7) anchors shall remain open and

operating or a Co-Tenancy Failure shall

be deemed to have occurred. The

anchors are as follows: K-Mart, Ashley

Furniture, Shop-Rite, Burlington Stores,

K-Mart, Hobby Lobby, Christmas Tree

Shops, and Bob’s Furniture.”

Is this a reasonable compromise?


How can we improve the compromise position that enables less ambiguity and protects each side?

• Using a certain square footage to define an anchor vs. named tenants? Better or worse, and for whom?

• Add that, no matter what, a certain tenant(s) must be open? Better or worse, and for whom?

• What else?


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“Landlord agrees that during (a) this lease, Shop-Rite (or its Replacement Tenant(s)) shall be open and operating from its respective premises, fully stocked and staffed, except due to casualty, condemnation, force majeure, and temporary closures for remodeling and restocking, and (b) three (3) of the following six (6) anchors, Bob’s Furniture, Christmas Tree Shops, Ashley Furniture, Burlington Stores, and K-Mart, must be open and operating from their respective premises, fully stocked and staffed, except due to casualty, condemnation, force majeure and temporary closures for remodeling and restocking (the “Ongoing Co-Tenancy Requirement”)”

Does this seem fair to both parties?


When, EXACTLY, does the Co-Tenancy Failure take place?

IV. How is Co-Tenancy Enforced?

A Tenant Has Gone Dark

• One party should notify another party upon a co-tenancy failure by sending written notice to

the other party.

• Penalties should be incurred after a certain period when the receiving party gets notice.

• What happens if the party who bares the responsibility of notifying does not notify the other

party?


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“If a co-tenancy failure has occurred, Tenant

shall notify Landlord of such a failure within

ninety (90) days following such failure by

sending written notice. Thirty (30) days after

Landlord has received such notice Tenant shall

be allowed to use remedies set forth below. If

Landlord does not receive notice within ninety

(90) days of such failure, then the co-tenancy

failure shall be null and void”

Is this a fairly written provision? How can we make this provision fair, clear and non-

punitive?


What do we have thus far?

“Landlord agrees that during (a) this lease, Shop-Rite (or its Replacement Tenant(s)) shall be open and

operating from its respective premises, fully stocked and staffed, except due to casualty, condemnation,

force majeure, and temporary closures for remodeling and restocking, and (b) three (3) of the following six

(6) anchors, Bob’s Furniture, Christmas Tree Shops, Ashley Furniture, Burlington Stores, and K-Mart, must be

open and operating from their respective premises, fully stocked and staffed, except due to casualty,

condemnation, force majeure and temporary closures for remodeling and restocking (the “Ongoing Co-

Tenancy Requirement”)

If a co-tenancy failure has occurred, Tenant shall notify Landlord within ninety (90) days following such

failure. If Landlord receives written notice within ninety (90) days, then Tenant shall have all rights and

remedies set forth below with regard to co-tenancy failure starting on the date of which the co-tenancy

failure actually occurred. If Landlord has not received a notice within three hundred sixty five (365) days

following the date on which such co-tenancy failure occurred, then such co-tenancy failure shall be deemed

not to have occurred.”



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What is the appropriate penalty for the Landlord in the event of a

Co-Tenancy failure?

PenaltiesV. How are Landlord & Tenant Protected?

Common Industry ThemesV. How are Landlord & Tenant Protected?

Crafting the Penalty Language

“If at any time during the Lease Term there is a co-tenancy failure (except due to casualty,

condemnation, force majeure, and temporary closures for remodeling and restocking), Tenant shall

have the right to pay 50% of base rent. If Tenant shall have paid 50% of base rent for a period of

twelve (12) consecutive months and the Ongoing Co-Tenancy requirement remains unsatisfied,

Tenant shall either (i) terminate the Lease by providing written notice thereof to Landlord within ten

(10) days after the expiration of such twelve (12) month period and thereafter the Lease shall expire

on the thirtieth (30th) day following Landlord’s receipt of such notice, or (ii) waive the then existing

failure of the ongoing Co-Tenancy requirement and resume payment of full base rent on the first day

of the immediately succeeding calendar month. In the event Tenant does not terminate the Lease

within the aforesaid ten (10) day period, Tenant shall be deemed to have elected to waive the failure

as set forth in clause (ii).”

V. How are Landlord & Tenant Protected?

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• Tenant has protection if a failure occurs

• Tenant can go to reduced rent and after a certain amount of time can terminate

• Landlord has protection from long term reduced rent. Tenant has to go back to full rent

or terminate after a certain period of time.

• Timeline for notice, termination, and reduced rent are outlined


Where do we stand?“Landlord agrees that during the term of the lease, Shop-Rite (or its suitable replacement(s)) shall be open and operating from its respective

premises, fully stocked and staffed, except due to casualty, condemnation, force majeure, and temporary closures for remodeling and

restocking. In addition, three (3) of the following six (6) anchors, Bob’s Furniture, Christmas Tree Shops, Ashley Furniture, Burlington Stores,

and K-Mart, must be open and operating from their respective premises, fully stocked and staffed, except due to casualty, condemnation,

force majeure and temporary closures for remodeling and restocking.

If a co-tenancy failure has occurred, Tenant shall notify Landlord within ninety (90) days following such failure. If Landlord receives written

notice within ninety (90) days, then Tenant shall have all rights and remedies set forth below with regard to co-tenancy failure starting on

the date of which the co-tenancy failure actually occurred. If Landlord has not received a notice within three hundred sixty five (365) days

following such failure that a co-tenancy failure has occurred, then the Co-Tenancy failure for that specific co-tenancy failure shall be deemed

not to have occurred.

If at any time during the this Lease there is a co-tenancy failure (except due to casualty, condemnation, force majeure, and temporary

closures for remodeling and restocking), Tenant shall have the right to pay 50% of base rent next due and payable. If Tenant shall have paid

50% of base rent for a period of twelve (12) consecutive months and the Ongoing Co-Tenancy Requirement remains unsatisfied, Tenant shall

either (i) terminate the Lease by providing written notice thereof to Landlord within ten (10) days after the expiration of such twelve (12)

month period, and thereafter the Lease shall expire on the thirtieth (30th) day following Landlord’s receipt of such notice, or (ii) waive such

co-tenancy failure and resume payment of full base rent on the first day of the immediately succeeding calendar month. In the event

Tenant does not terminate the Lease within the aforesaid ten (10) day period, Tenant shall be deemed to have elected to waive such co-

tenancy failure as set forth in clause (ii). “


How does the Landlord actually cure a Co-Tenancy failure?


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Key points of consideration:

• Who is an acceptable replacement Tenant(s)?

• Where can the replacement Tenant(s) be located in the shopping center?

• What percentage of GLA of named co-tenant must be replaced?

How to Remedy a Co-Tenancy

THIS IS ONE OF THE LARGEST REASONS FOR CO-TENANCY LITIGATION. BE SURE TO

CLEARLY ARTICULATE HOW A CO-TENANCY IS CURED IF A FAILURE OCCURS!



Is the below reasonable?

“To cure a Co-Tenancy failure, Landlord must

replace an anchor with a national retailer. A

national retailer is defined as a Tenant that

has at least 100 stores in more than 26

states in the United States of America.”


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“As used herein, a “Replacement Tenant” shall mean a tenant with at least two (2)

other locations whose use is typically found in first class shopping centers, medical

tenants, health clubs, and other tenants typically found in first class shopping

centers.

Replacement Tenants shall occupy at least 80% of the floor area previously occupied

by the co-tenant being replaced. For the K-Mart and Burlington spaces (shown as

space 1 and space 40 on the site plan), 80% of the floor area may be occupied by up

to three (3) different tenants to cure the co-tenancy failure so long as each of the

three (3) tenants qualifies as a Replacement Tenant as set forth above. For all other

anchor spaces, 80% of the floor area may be occupied by up to two (2) different

tenants to cure the co-tenancy failure, so long as each of the two (2) Tenants

qualifies as a Replacement Tenant as set forth above.

Notwithstanding the forgoing, if during this Lease one of the anchors’ space changes

in size, then the new square footage of such space will be deemed the new anchor

size, provided, however, at no time shall the size of the anchor be less than 90% of

the size as of the effective date of this Lease.”



“Landlord agrees that during (a) this lease, Shop-Rite (or its Replacement

Tenant(s)) shall be open and operating from its respective premises, fully

stocked and staffed, except due to casualty, condemnation, force majeure,

and temporary closures for remodeling and restocking, and (b) three (3) of

the following six (6) anchors, Bob’s Furniture, Christmas Tree Shops, Ashley

Furniture, Burlington Stores, and K-Mart, must be open and operating from

their respective premises, fully stocked and staffed, except due to casualty,

condemnation, force majeure and temporary closures for remodeling and

restocking (the “Ongoing Co-Tenancy Requirement”)

If a co-tenancy failure has occurred, Tenant shall notify Landlord within

ninety (90) days following such failure. If Landlord receives written notice

within ninety (90) days, then Tenant shall have all rights and remedies set

forth below with regard to co-tenancy failure starting on the date of which

the co-tenancy failure actually occurred. If Landlord has not received a

notice within three hundred sixty five (365) days following the date on

which such co-tenancy failure occurred, then such co-tenancy failure shall

be deemed not to have occurred.

If at any time during the this Lease there is a co-tenancy failure (except due

to casualty, condemnation, force majeure, and temporary closures for

remodeling and restocking), Tenant shall have the right to pay 50% of base

rent next due and payable. If Tenant shall have paid 50% of base rent for a

period of twelve (12) consecutive months and the Ongoing Co-Tenancy

Requirement remains unsatisfied, Tenant shall either (i) terminate the Lease

by providing written notice thereof to Landlord within ten (10) days after

the expiration of such twelve (12) month period, and thereafter the Lease shall

expire on the thirtieth (30th) day following Landlord’s receipt of such notice, or (ii)

waive such co-tenancy failure and resume payment of full base rent on the first day

of the immediately succeeding calendar month. In the event Tenant does not

terminate the Lease within the aforesaid ten (10) day period, Tenant shall be

deemed to have elected to waive such co-tenancy failure as set forth in clause (ii).

As used herein, a “Replacement Tenant” shall mean a tenant with at least two (2)

other locations whose use is typically found in first class shopping centers, medical

tenants, health clubs, and other tenants typically found in first class shopping

centers.

Replacement Tenants shall occupy at least 80% of the floor area previously occupied

by the co-tenant being replaced. For the K-Mart and Burlington spaces (shown as

space 1 and space 40 on the site plan), 80% of the floor area may be occupied by up

to three (3) different tenants to cure the co-tenancy failure so long as each of the

three (3) tenants qualifies as a Replacement Tenant as set forth above. For all other

anchor spaces, 80% of the floor area may be occupied by up to two (2) different

tenants to cure the co-tenancy failure, so long as each of the two (2) Tenants

qualifies as a Replacement Tenant as set forth above.

Notwithstanding the forgoing, if during this Lease one of the anchors’ space changes

in size, then the new square footage of such space will be deemed the new anchor

size, provided, however, at no time shall the size of the anchor be less than 90% of

the size as of the effective date of this Lease.”


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• Grand Prospect Partners v. Ross Dress for Less, Inc.

• Kleban Holding co. LLC v. Ann Taylor Retail, Inc.

• Old Navy, LLC v. Center Developments Oreg., LLC

Case Studies

VII. Case Studies

A Solution for the Future?VIII. Solutions for the Future

Using tenant sales as our guide? No harm, foul? Can we focus on protecting the Tenant rather than punishing the Landlord?

• Tenant has to show some sort of meaningful decrease in sales before it gets to enforce penalties on the Landlord?

• If there is no decrease in sales then the circumstances could prove to be non-harmful?

• Have alternate rent be based on a tenant’s occupancy cost?

• What else?

Can Co-Tenancy provisions be fair, but non-punitive?

VIII. Solutions for the Future

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One Size Doesn’t Fit All

• When the Co-Tenancy event consequences affect intrinsic value. For example, a Tenant might feel it dilutes their brand?

• When Co-Tenancy can’t be quantified in one event, rather the erosion of sales happens over time?

• What else?

VIII. Solutions for the Future

Questions?

CHRIS RESSA, CLS

SR. VICE PRESIDENT – LEASING,

NORTHEAST & MIDWEST

DLC MANAGEMENT CORP.

580 WHITE PLAINS ROAD, 3rd Floor

TARRYTOWN, NY 10591

D 914.304.5642 | T 914.631.3131

C 914.760.3145 | F 914.560.2280 E [email protected]

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Win-Win Co-Tenancy Provisions

for Tenants and Landlords

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What is a Co-Tenancy Provision?...5/18/2016 3 • Execution Co-Tenancy: – Before the center is built the Landlord must show a certain amount of leases have been executed. This can