In order to protect against a shopping center becoming less populated with retail department stores or so-called “anchor” tenants, tenants will request, and frequently obtain, co-tenancy provisions in their lease documents. While the co-tenancy provisions will vary from tenant to tenant, most co-tenancy provisions will at least protect the tenant from “anchor” stores ceasing to operate for business (i.e., “going dark”) and from a certain percentage of “in-line” tenants being closed for business. However, the co-tenancy provisions are often very vague as to how a landlord will be deemed to have cured a situation where an anchor store has closed for business. As a result, the following issues often are not addressed in the lease: (i) does the entire anchor tenant space that has closed for business need to be leased and open for business in order to cure the co-tenancy condition; (ii) can the space previously occupied by the anchor tenant be occupied by a mix use of tenants in order to cure the co-tenancy condition; and (iii) are there any restrictions on the type of replacement anchor tenant that can open for business and cure the co-tenancy condition.
On a very frequent basis these days, landlords are taking the position that not all of the space previously occupied by the original anchor tenant needs to be leased and open for business in order to cure a co-tenancy condition. Landlords are asserting the position that simply because a 200,000 square foot anchor tenant previously existed, such a footprint for a department store may be obsolete in current times, and an anchor tenant that occupies 150,000 square feet or less should serve to cure the co-tenancy condition.
While a tenant may be amenable to having a smaller anchor store satisfy the co-tenancy condition, a tenant should be careful when negotiating its co-tenancy provision, so that the square footage of the replacement anchor tenant is addressed in such provision. Frequently, an anchor store occupying eighty percent (80%) of the square footage of the previous anchor tenant space will be deemed by the tenant to be satisfactory in order to satisfy the co-tenancy condition. If, however, the issue of the square footage of the replacement anchor tenant is not addressed in the co-tenancy provision, and the co-tenancy provision only centers on the number of anchor stores that must be open for business at the shopping center, a tenant may find that an anchor store occupying significantly less square footage than the previous anchor tenant may serve to satisfy the co-tenancy provision, (since the only definition that will need to be satisfied, is the definition of an “anchor” tenant in the lease). Often, the definition of an “anchor” tenant in the lease will contain a square footage significantly smaller than the smallest anchor tenant operating at the shopping center. This is particularly important in shopping centers where there are very few anchor tenants and a tenant may have expected that any replacement anchor tenant would be at least as large as the existing department store tenants.
All to often in negotiated co-tenancy provisions, a tenant accepts language that simply provides that the square footage occupied by the anchor store must be leased and open for business in order to cure the co-tenancy provision. If this language is accepted by a tenant, a tenant may be surprised to learn that instead of replacing the anchor tenant with another anchor tenant, the landlord has leased the space previously occupied by an anchor store to numerous in-line tenants or has created a “life-style” component to the shopping center that does not even face the interior mall of the shopping center or have an access to the interior of the shopping center. This issue is especially critical if the tenant is located immediately adjacent to the anchor tenant that has closed for business and the tenant had utilized the anchor tenant in order to attract customers to this particular tenant’s location prior to the anchor tenant going “dark.” Also, if the life-style area that is added to replace the anchor tenant contains a key competitor of the tenant, that competitor may be able to gain access to customers before the customers even enter the interior of the shopping center.
A tenant would be wise to indicate a certain number of anchor tenants that must be leased, occupied and open for business at all times, in order to satisfy the co-tenancy provision. Further, a tenant should specifically address whether a mixed-use of in-line tenants or a life-style group of free standing tenants will be deemed to satisfy the co-tenancy provision. Often, a compromise position would allow the landlord to replace the anchor tenant with a combination of: (i) a smaller anchor tenant; and (ii) a mix-use of tenants, so long as the anchor store remained adjacent to or in close proximity to the tenant in question, the anchor tenant maintained an entrance to the interior portion of the shopping center, the replacement anchor tenant and mix-use of tenants occupy at least eighty percent (80%) of the floor area occupied by the former anchor tenant, and the mixed-use of tenants do not contain a direct competitor of the particular tenant.
It has become all too common in lease documents to simply address all anchor tenants in a generic manner. For instance, the definition of an anchor tenant may be a tenant that occupies at least 50,000 square feet in the shopping center. By utilizing this type of definition, an anchor tenant could be any of the following: (i) a discount retailer; (ii) a military recruitment office; (iii) a post office; (iv) a fashion retailer; (v) an amalgamation of several small tenants all owned by one company; or (vi) any other type of premises occupying at least 50,000 square feet. However, if the tenant was asked prior to executing the lease what the tenant expected an anchor tenant to be, the tenant would most likely indicate that an anchor tenant was a full service fashion retailer, comparable to the anchor tenants that were present at the shopping center at the time the tenant executed its lease.
Therefor, a tenant should be very careful in negotiating the definition of an “anchor” tenant. In particular, a tenant should request that an anchor tenant be a store that contains at least a certain number of square feet (the definition of an anchor in terms of square footage will vary from location to location) of contiguous retail space occupied by a single tenant under a single trade name. By utilizing the above definition, a tenant can protect itself from an anchor being a collection of smaller stores under separate trade names (but owned by one (1) tenant) and also assure itself that the anchor store will be “retail” in character (thereby eliminating post offices and military recruitment centers).
In addition, a tenant should pay special attention to the type of anchor store that is being used as the replacement anchor tenant. For instance, a tenant may want to indicate in the co-tenancy provision that an anchor tenant can not be a discount retailer and must be a full service fashion retailer. Also, a tenant may want to provide that the replacement anchor tenant is comparable in nature to the anchor tenant that it is replacing, including, but not limited to, similar price points, merchandise, quality and frontage on the enclosed shopping center.
Careful drafting of the co-tenancy provisions relating to the types of qualifying replacement anchor tenants will help provide clarity as to when a landlord has effectively cured an “anchor” tenant that has gone “dark.”
American Lawyer Media, Commercial Leasing Law & Strategy Volume 19, Number 11, April, 2007