Understanding Co-Tenancy Clauses in Retail Leases: An Expert’s Guide

Look, if you’ve ever signed a retail lease, you’ve probably glossed over the co-tenancy clause buried somewhere in the middle of that 40-page document. Most people do. But here’s the thing – that clause might be the difference between your business surviving a rough patch or going under when your biggest neighbor decides to pack up and leave.

What exactly is a co-tenancy clause? It’s basically your insurance policy against getting screwed when other tenants bail. The clause links your rent payments to who else is actually open and doing business in your shopping center. Makes sense, right? If the big department store that brings in 70% of your foot traffic suddenly closes, why should you keep paying rent like nothing happened?

I learned this lesson the hard way about fifteen years ago. Had a client with a small jewelry store right next to Sears. When Sears announced they were closing, her sales dropped 40% almost immediately – and that was before they even turned off the lights. Luckily, we’d fought for a solid co-tenancy clause during lease negotiations. Her rent got cut in half until they found a replacement tenant. Without that protection, she would’ve been toast.

Why Co-Tenancy Clauses Matter to Retailers

Here’s what drives me crazy – retailers will spend months agonizing over whether their rent is $28 per square foot or $32, but they won’t spend five minutes thinking about what happens when their anchor tenant disappears. It’s backwards thinking.

The statistics are pretty sobering. When major anchors close, surrounding businesses typically see traffic drops between 25% and 50%. I’ve seen it happen dozens of times. The pet store loses customers when the grocery store closes. The cell phone repair shop struggles when the electronics retailer shuts down. It’s all connected.

But here’s what’s interesting – most landlords actually understand this dynamic better than tenants do. They know that empty anchor spaces hurt everyone. A good landlord will work with you when co-tenancy issues arise because they want to keep the center viable too. The key is having the legal framework in place to force that conversation.

Types of Co-Tenancy Clauses

There are really two main flavors of these clauses, and you probably want both if you can get them.

Opening Co-Tenancy is pretty straightforward. You don’t have to open your store or start paying full rent until certain other tenants are up and running. Let’s say you sign a lease for a spot in a new development where they’re promising a Target as the anchor. Opening co-tenancy means you’re not on the hook for rent until Target actually opens their doors and starts bringing in customers.

The trick here is being specific. Don’t accept vague language like “a major retailer.” Name names. Say “Target Corporation” or whoever the promised anchor is supposed to be. Trust me on this – landlords love to get creative with substitutions if you give them wiggle room.

Operating Co-Tenancy is your ongoing protection after you’ve opened. This one kicks in if specified tenants close or if overall occupancy drops below a certain threshold. Let’s say your clause requires that Macy’s stays open and that the center maintains 80% occupancy. If Macy’s closes or too many other stores go dark, your remedies kick in.

The remedies are where things get interesting. Most clauses offer some combination of rent reduction, modified operating hours, or the right to terminate your lease entirely. I always push hard for rent abatement first – immediate relief when your traffic disappears. But the termination right is crucial too, especially if the problems drag on for months.

Had a client a few years back whose anchor grocery store closed for “renovations” that stretched into eight months. The rent abatement helped, but ultimately they needed to get out of there entirely. The termination right we’d negotiated saved them from being stuck in a dead location for three more years.

Real-World Impact

Let me tell you about two different outcomes I’ve seen, because they really illustrate why this stuff matters.

First case: upscale kitchen boutique in a lifestyle center. Their whole business model depended on the Williams Sonoma and Pottery Barn drawing in affluent customers who might wander over for unique gadgets and gourmet foods. When Williams Sonoma’s lease wasn’t renewed, we knew there would be trouble.

But we’d been smart during the original negotiation. The co-tenancy clause specifically named Williams Sonoma and included automatic rent reduction if they closed. When they left, my client’s rent dropped from $8,000 to $4,800 per month. That extra $3,200 monthly helped them weather six months of reduced traffic until a high-end furniture store moved into the space. They’re still there today, doing better than ever.

Second case: specialty electronics store in a regional mall. This was before I started working with them, and their lease had one of those useless generic co-tenancy clauses. It said something like “a major department store must remain in operation.” When Macy’s closed, the landlord argued that the JCPenney on the other end of the mall satisfied the requirement.

Technically true, but practically useless. Macy’s was right across from my client and generated most of their foot traffic. JCPenney was a quarter-mile away through a mostly empty mall. Sales dropped 60% almost overnight. Without specific language protecting against this kind of substitution, they had zero leverage. They ended up closing within eight months.

Monitoring and Enforcement

Having great lease language doesn’t mean much if you’re not paying attention to what’s happening around you. I tell all my clients to do a walkthrough of their center at least once a month. Look for “For Lease” signs, reduced hours, clearance sales – anything that might signal a tenant is struggling.

When you do spot problems, document everything. Take photos of empty storefronts with dates. Keep records of your sales during the affected period. If you need to make a co-tenancy claim later, this evidence will be crucial.

Most leases have specific procedures for notifying the landlord about co-tenancy violations. Some require certified mail, others want electronic notice through a portal. Follow the rules exactly, because missing a deadline or using the wrong notification method can kill an otherwise valid claim.

I learned this lesson with a client whose major anchor closed right before Christmas – their busiest season. We had a slam-dunk co-tenancy claim, but their lease required notice within 30 days of the violation. They were so busy trying to salvage their holiday sales that they didn’t get around to sending the notice until day 35. The landlord’s response? “Too bad, you missed the deadline.” Cost them about $15,000 in rent abatement they should have received.

Common Mistakes to Avoid

The biggest mistake I see is assuming all co-tenancy clauses are created equal. They’re not. Some are worth the paper they’re printed on, others are completely useless.

Generic language is your enemy. Clauses that talk about “major retailers” or “department stores” without naming specific tenants are almost worthless. Landlords will find the cheapest, most marginal replacement they can and argue it satisfies the requirement.

Another common problem is focusing only on rent reduction while ignoring termination rights. Sure, paying half rent is better than full rent when your traffic disappears. But sometimes the best solution is getting out entirely, especially if the center is in long-term decline.

I also see tenants who get so focused on negotiating rent rates that they completely ignore co-tenancy protections. They’ll fight over 50 cents per square foot but accept boilerplate co-tenancy language that leaves them completely exposed. It’s penny wise and pound foolish.

Building Stronger Lease Protections

Here’s the bottom line – retail is risky enough without taking unnecessary gambles on your neighbors’ stability. A good co-tenancy clause won’t prevent anchor tenants from closing, but it can prevent those closures from taking your business down with them.

The best protection starts during lease negotiation, before you’re emotionally invested in a particular space. That’s when you have maximum leverage to demand specific tenant names, reasonable occupancy thresholds, and meaningful remedies.

Don’t try to wing this stuff on your own. Retail leases are complicated documents with consequences that play out over years or decades. The money you spend on proper legal advice upfront is nothing compared to what you’ll lose if you get stuck in a dying shopping center with no way out.

The retail landscape keeps changing, and it’s not getting any more predictable. Online shopping, changing consumer habits, economic uncertainty – there are plenty of factors beyond your control that affect your business. Co-tenancy clauses are one area where you can actually control your exposure to other people’s failures. Take advantage of that protection while you can still negotiate for it.