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Understanding co-tenancy clauses

On Behalf of | Mar 31, 2022 | Real Estate Law |

If you’re looking at commercial spaces for your business, you’re likely interested in what other businesses are in the same complex or development. Retail and food businesses, in particular, can benefit significantly by having an anchor tenant (sometimes called a key tenant) in a shopping center.

If there’s a popular anchor tenant in a shopping center, the landlord likely can charge smaller tenants higher rent because that anchor tenant will attract customers who can then find their way over to their business. Moms and daughters going to Macy’s to shop for prom dresses might stop at your smoothie establishment or bakery before they head home, for example.

How a co-tenancy clause can protect your business

But what happens if an anchor tenant moves out or goes out of business? A lot of big-name retailers of all kinds have downsized, merged or folded entirely in recent decades. 

That’s where a good co-tenancy clause in your lease can help protect you if this happens to an anchor tenant. Typically, a co-tenancy clause allows tenants to negotiate a lower rent if an anchor tenant leaves. This can be a lifesaver for small businesses that could see significantly decreased traffic if a big tenant leaves.

Note the conditions in your co-tenancy clause

Most co-tenancy clauses have stipulations for smaller tenants to invoke their right to a rent decrease. For example, you typically must provide evidence of a loss of sales for a specified period after the anchor tenant leaves. You also generally can’t be in default on your lease.

Not surprisingly, landlords would prefer not to include co-tenancy clauses that allow tenants to get rent decreases. Your chances of getting one as a new business can be helped by having legal guidance in your negotiations.