Retail commercial real estate can be very profitable, but the leases can be complex. You must negotiate many factors before you sign the lease, and it's helpful to understand some of the factors you should be fighting for in your lease agreement.
One clause that retail tenants will often request is a co-tenancy clause. This type of clause has the potential to provide your business with financial relief if a neighboring business leaves your shopping center.
Learn more about co-tenancy clauses so that you can use them to your advantage when leasing retail space in the future.
1. Co-Tenancy Clauses Link Your Business to an Anchor
Shopping centers often feature an anchor store that is surrounded by other smaller retail businesses.
Anchor stores can be major grocery chains or department stores that draw a lot of traffic to the shopping center. The smaller businesses around the anchor store rely on this traffic to boost sales.
A co-tenancy clause allows for a rent reduction in the event that an anchor store pulls out of the shopping center. If you have a business that relies heavily on the traffic brought in by a larger anchor store, a co-tenancy clause is essential.
2. Co-Tenancy Clauses Usually Have a Cure Period
A cure period is typically included in co-tenancy clauses as a way to protect commercial landlords against significant financial loss. The cure period is essentially a grace period in which the landlord can bring in another anchor store before the co-tenancy clause is invoked.
You should pay close attention to the language in a co-tenancy clause related to the cure period.
Be sure that the cure period is long enough to provide reasonable time for the landlord to find a new tenant but short enough to protect your business against permanent financial damage in the event an anchor store leaves your shopping center.
3. Relief Options Vary in Co-Tenancy Leases
Not all co-tenancy leases offer the same type of financial relief. The relief measures are used as a platform for negotiations between a commercial landlord and potential retail tenants.
There are typically two different types of relief settled upon in commercial leases with a co-tenancy clause: rent reduction and early lease termination.
Rent reduction relief is stated as a percentage of your total sales. This means that your rent amount could vary from month to month when a co-tenancy clause is invoked.
Early lease termination gives you the ability to terminate your retail lease without penalty when an anchor store is absent for a prescribed amount of time.