In this troubled economy, co-tenancy provisions are playing a critical role in retail leases. The Wall Street Journal recently reported that retail tenants with co-tenancy rights in their leases are “eking out critical savings” to counter the drop in sales. Vendors are offering services that track store closings at shopping centers for purposes of co-tenancy claims. Retailers are seeking reduced rents or even terminating leases when co-tenancy conditions are not satisfied.
As shopping centers reach unprecedented vacancy levels, are you doing everything you can to control costs by asserting co-tenancy rights? If your leases contain co-tenancy provisions or you are in a position to negotiate these terms in the future, the following four steps may help you cut costs in troubled times.
First, review your leases to identify co-tenancy provisions. Record any co-tenancy obligations in an easily accessible format, so that you can refer to these terms periodically to enforce your co-tenancy rights.
Second, investigate the facts to determine whether the co-tenancy conditions in your leases are satisfied. Have the anchor stores closed? Are they occupied by non-retail tenants? What are the vacancy rates at the shopping center? You need to gather the facts to determine whether you are entitled to reduced rent or other remedies based on co-tenancy provisions in the lease.
Third, if the co-tenancy conditions are not satisfied and you are entitled to relief under the lease, make a demand to the landlord. Be persistent. Demonstrate that not only is your claim solid, but you will pursue it if the landlord does not provide the requested relief.
Fourth, use this downturn in the economy to negotiate better co-tenancy terms in your leases. Due to high vacancy levels currently, your tenancy is valuable. This may be the time to use your leverage to negotiate valuable co-tenancy provisions for the future.
Step 1: Review your leases to identify your co-tenancy rights.
The first step in seeking savings based on co-tenancy rights is to read your leases. Identify co-tenancy conditions or obligations and think about what is required to satisfy them. There may be a co-tenancy provision relating to anchor stores. Does the lease require that certain anchor stores be occupied and open for business? Does it identify the tenants for the anchor stores or the type of business? Does it provide a list of alternate anchor stores if the identified stores vacate the property?
There also may be a co-tenancy provision relating to occupancy of the remainder of the shopping center. For example, there may be a condition that “80% of leasable space (excluding the anchor stores) is occupied by retail tenants which are open and operating.” Pay careful attention to the method for calculating the percentage. In determining the denominator, consider what is excluded. If space previously occupied by Mervyn’s now sits vacant, does the vacant space still get excluded as an anchor store? If the space previously occupied by Mervyn’s has been converted to a public library, does the library get excluded as an anchor store? Similarly, consider what is included in the numerator. Does the numerator include all space open for business or only space being used for retail sales? Does it include all leased space regardless whether it is open for business? These questions should be answered based on the lease language.
Once you have identified the co-tenancy conditions in the lease, next determine your remedy if the co-tenancy conditions are not satisfied. The lease may provide that the only remedy is the right to terminate the lease. Or, the lease may provide for reduced rent or the opportunity to “go dark.” Some leases provide that a tenant is entitled to the remedy immediately after the co-tenancy conditions are not satisfied. Other leases provide a grace period for the landlord or require the tenant to “elect” one of the available remedies. It is important to be familiar with your potential remedies and how and when you must assert them.
Step 2: Investigate the facts to determine whether the co-tenancy conditions are satisfied.
It is up to the tenant to investigate whether it has a viable co-tenancy claim against the landlord. Even if your lease provides that the landlord is required to notify you when co-tenancy conditions are not satisfied, you should not sit back and assume the landlord will do so.
There are many methods to investigate a co-tenancy claim. Some co-tenancy information can be gathered by going to the computer and searching the Internet. You often can learn a lot about a potential co-tenancy claim by looking at the shopping center website. A walk-through of the shopping center also can reveal co-tenancy facts. Store management can be asked to report on the tenants of the center and on the vacancies.
However, depending on the co-tenancy terms, in many situations you will have to submit an inquiry to the landlord to determine the facts supporting a co-tenancy claim. This type of request should be in writing. It should be as specific as possible and in most circumstances should include a request for occupancy information for every square foot of the center, including the name of the tenant and its business, the square feet occupied by that tenant and whether the tenant is open for business. If the lease provides that you are entitled to this information, you should cite to the specific provision in your letter. If the lease does not specifically provide for your right to obtain this information, do not be deterred. Ask for it anyway. You are entitled to the facts supporting the obligations under the lease. See PV Properties, Inc. v. Rock Creek Village Associates Ltd. Partnership, 549 A.2d 403, 410 (Md. Ct. Spec. App. 1988) (finding fiduciary obligation to provide backup for lease charges; “Reason and fairness require that the tenant be afforded some means of verifying the charges assessed against it.”).
Further, it is a good practice to regularly ask the landlord for occupancy information on a quarterly basis even if you do not suspect a co-tenancy claim. If the landlord refuses to provide the information in response to your requests, you can later argue that any delay in asserting your co-tenancy rights was a result of the landlord’s improper conduct.
Step 3: Convince the landlord of the strength of your claim and that you will pursue a lawsuit if the landlord does not provide the remedy you seek.
Once you have identified the basis for a co-tenancy claim, you will need to submit the claim to your landlord. State your claim in writing. Be clear about the grounds of your claim and the remedy you seek, and cite to the relevant provisions of the lease. If your lease requires you to “elect” a particular remedy, be clear that you are doing so under the lease. If you have multiple claims based on multiple leases against the same landlord, combine them in a single letter. A landlord may be more responsive if your claim is larger.
Be prepared for push-back from the landlord. The landlord may argue a different interpretation of the co-tenancy provision. See Rathbun v. Cato Corp., 93 S.W.3d 771 (Mo. Ct. App. 2002) (holding the term “similar type and size business” in a co-tenancy provision was ambiguous and its meaning must be determined based on evidence of the parties’ intent outside of the lease). Be prepared to explain your interpretation based on the language in the lease.
The landlord also may argue that you waived the co-tenancy rights by waiting too long to assert them. Be prepared with a justification for any delay. For example, some leases require the landlord to notify the tenant when co-tenancy conditions are not satisfied. In such cases, if the landlord failed to notify the tenant, any delay in asserting a co-tenancy right should not be the fault of the tenant.
Even if the landlord ignores your requests or continues to refute your rights to relief, be persistent and continue to state your case. If you do not convince the landlord that you are willing to pursue the issue in court, the landlord may feel no incentive to respond to your demands.
Finally, hiring a lawyer may be the only way to convince a landlord that you are willing to pursue your co-tenancy claim. When a landlord is faced with the prospect of hiring an attorney to defend a legal claim, a landlord may be more willing to negotiate a resolution of the dispute. However, if you threaten a lawsuit, be prepared to follow through. A landlord will remember if you fail to follow through on a legal claim and may be even less responsive to future claims.
Step 4: Look for opportunities to improve co-tenancy provisions in future leases.
Because of high vacancy levels at some shopping centers, tenants may have more leverage than before in negotiating favorable co-tenancy provisions. This may be an opportunity to include co-tenancy provisions in new or amended leases or improve them where appropriate.
For example, it is best to put the burden on the landlord when co-tenancy conditions are not satisfied. Avoid language providing that the tenant may “elect” certain remedies. Instead, provide that once the co-tenancy conditions are not satisfied, rent is reduced or some other remedy automatically takes effect. Further, it is optimal to include a requirement that the landlord notify the tenant when co-tenancy conditions are not satisfied. If the landlord fails to send the notice, the tenant has a solid defense for any delay in asserting a co-tenancy claim.
Finally, if you have ever been confused about the language of your co-tenancy provisions or you have noticed ambiguities, this may be a good time to clarify the language so that there is no dispute in the future.
As stores continue to close in shopping centers, now more than ever is the time to pay attention to co-tenancy provisions in retail leases. Review your leases; gather the facts; and submit demands for relief to your landlords if co-tenancy conditions are not satisfied. Enforcing co-tenancy rights can be a significant way to control costs.