January 24, 2012

Co-Tenancy Clauses Now at the Forefront of Retail Lease Negotiations

Lori kilberg hartman simons

With the wobbly economy taking a toll on retailers in recent years – Borders, Circuit City, Filene’s and Linens ’N Things are some of the high-profile chains that have filed for bankruptcy since the recession started – the issue of co-tenancy clauses is bigger than ever.

The January 2012 issue of Southeast Real Estate Business examines the subject in its cover story, and Hartman Simons partner Lori E. Kilberg (pictured at left) is quoted extensively in the article.

A co-tenancy clause is a lease provision that gives a shopping-center tenant some sort of protection – perhaps reduced rent or the option to terminate its lease – if one of the center’s key tenants vacates its space. A retailer often selects a shopping center because it anticipates spillover traffic from a high-profile co-tenant. 

The brutal economic climate of the past few years has brought co-tenancy provisions to the forefront of retail lease negotiations: tenants, skittish about the financial well-being of their neighbors, want them more than ever, while property owners, desperate to hang on to other revenue streams in the event that an important tenant goes belly up, are more reluctant than ever to grant them.

“Landlords have seen what has happened with co-tenancies and centers emptying out because of the domino effect of a couple tenants leaving,” Kilberg told Southeast Real Estate Business.

A co-tenancy provision usually gives a property owner a certain amount of time to find a qualified replacement before another tenant’s relief takes effect. However, when it comes to replacing a Borders or a Circuit City, “the problem is, how many big-box tenants are still around to take those places?” Kilberg said in the article. “Depending on how stringent the qualified replacement tenant definition is, landlords can be really hard-pressed to find qualified tenants to take that space.”

For more from Kilberg and other experts on the subject, read “Clause and Effect: Co-Tenancy Provisions Pit Landlords against Retailers.”

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