Co-Tenancy Clause in a Retail Lease

A co-tenancy clause is a provision in a retail lease that automatically reduces rent or allows the tenant to exit if a major tenant (often an anchor store) departs or sales drop below a specified threshold, protecting the tenant against a sudden collapse in foot traffic.

Why co-tenancy clauses exist in retail leases

Shopping centers—particularly enclosed malls and mixed-use centers—operate on a tenant ecosystem principle. Anchor tenants like department stores, supermarkets, or big-box retailers draw foot traffic that benefits smaller specialty retailers, restaurants, and service providers. If an anchor tenant leaves, traffic evaporates, sales drop, and smaller tenants struggle to justify their rent. Before co-tenancy clauses became standard, a single departing anchor could trigger a cascade of retail failures.

The co-tenancy clause shifts some of that risk from the tenant to the landlord, acknowledging that a retail lease is not a standalone commercial contract but part of a larger shopping experience. A tenant leasing 2,000 sq. ft. in a mall accepts the rent in part because they expect foot traffic generated by the anchor. If the anchor goes, the tenant’s ability to generate sales is materially diminished, yet their absolute rent obligation remains unchanged. A co-tenancy clause makes the landlord share in that risk.

Types of co-tenancy triggers

Co-tenancy clauses typically include one or more of the following triggers:

Anchor tenant departure: The most direct trigger. If a specific anchor tenant (named in the lease or defined by square footage or sales volume) vacates, the clause is activated. For example, “if Nordstrom or any anchor tenant exceeding 40,000 sq. ft. departs and is not replaced within 12 months, tenant may terminate or rent is reduced by 25%.”

Occupancy thresholds: The center falls below a certain occupancy percentage, typically 75–85%. For example, “if the center is less than 80% occupied for 90 consecutive days, base rent decreases by 20% until occupancy returns above 80%.”

Sales-based thresholds: The center’s aggregated tenant sales fall below a specified amount or percentage. This is less common and harder to audit, since it requires all tenants to report sales (which many resist), but some larger tenants negotiate these clauses.

Co-tenancy space loss: If the center loses a certain percentage of its total leasable area—either through anchor vacancy or multiple smaller tenant departures—the clause triggers.

Rent reduction and termination rights

The consequences of triggering a co-tenancy clause vary by lease:

Rent reduction (most common): Base rent decreases by a fixed percentage, typically 10–50%, until the condition is cured. For example, a tenant paying $40/sq. ft. annually might see rent drop to $30/sq. ft. (a 25% cut) if an anchor leaves. This acknowledges lower foot traffic and sales potential.

Termination right: The tenant may terminate the lease and vacate without penalty. This is valuable to the tenant, because it allows them to exit a failing property rather than ride it down. Landlords resist full termination rights and often negotiate for a “co-tenancy suspension” instead—rent is reduced, but the tenant cannot leave; they must stay and wait for the property to recover.

Rent abatement: In some cases, rent is suspended entirely (not paid) during the co-tenancy event, with obligations resuming once the condition is cured.

Combination structures: A lease might reduce rent by 25% for the first 90 days after an anchor departure, then increase to 40% reduction if the anchor is not replaced within 6 months, and grant a termination right if the vacancy persists for 12 months.

Defining “anchor” and avoiding disputes

Ambiguity over what counts as an “anchor” is a major source of litigation. A well-drafted co-tenancy clause specifies:

• Named anchor tenants (e.g., Macy’s, Target, or Kroger by name), or
• Objective definitions (e.g., “any tenant occupying more than 30,000 sq. ft.” or “any tenant representing more than 15% of center sales”), or
• A tiered approach (e.g., “Loss of a top-5 tenant by sales triggers 15% rent reduction; loss of a top-2 tenant triggers 40% reduction and termination right after 12 months”).

Disputes arise when a tenant vacates a large space but a replacement anchor opens within months, or when a large tenant shrinks (e.g., downsizes from 40,000 to 20,000 sq. ft. but stays). The lease should address whether the clause is triggered by the closure of an anchor space or by the permanent loss of that anchor’s customer draw.

Financial impact on landlords and property value

A strong co-tenancy clause materially reduces a landlord’s revenue and the property’s financing capacity. A lender appraising a retail property with aggressive co-tenancy clauses will discount the potential income, because rent reduction is contractually guaranteed if the property underperforms. This reduces the loan amount the landlord can secure and lowers the property’s market capitalization.

Institutional investors and commercial real estate lenders scrutinize co-tenancy terms closely. A property with:

• Liberal rent reduction triggers (e.g., 75% occupancy threshold)
• A high percentage rent reduction (e.g., 50% cut)
• Tenant termination rights

will be valued lower and financed at less favorable terms than one with minimal co-tenancy exposure.

From a landlord’s perspective, they manage co-tenancy risk by:

1. Negotiating narrower definitions of anchors (e.g., limiting the clause to named, specific tenants).
2. Setting high occupancy thresholds (e.g., 80–85%, so temporary vacancies don’t trigger reductions).
3. Capping rent reductions at a manageable level (e.g., no more than 30%).
4. Avoiding termination rights where possible; if a tenant insists, negotiating a long cure period (e.g., landlord has 18 months to replace the anchor).
5. Excluding small or short-term tenants from the co-tenancy calculation.

Post-pandemic evolution

The 2020–2023 retail crisis—with widespread anchor closures and mall distress—exposed the weight of co-tenancy clauses. Landlords faced cascading rent reductions or tenant terminations as major anchors like Bed Bath & Beyond, Stein Mart, and others shut down. Many landlords renegotiated leases to soften co-tenancy triggers or buy out the rights entirely, paying tenants a one-time fee to remove the clause.

In response, newer retail leases often include:

• Replacement cure periods: The landlord has 12–24 months to replace a departed anchor; if they do, the co-tenancy condition is deemed cured.
• Sales-vs.-occupancy hybrids: Co-tenancy is triggered only if both an anchor departs and center sales fall below a threshold, requiring a compound failure.
• Graduated reductions: A tiered schedule where rent reduction increases over time if the condition persists (e.g., 15% reduction for months 1–6, 25% for months 7–12, 40% thereafter).

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