Thousands of small business owners across the country have woken up sometime recently to a headline that the major store in their shopping center just went out of business. Most recently, it was Toys R Us on a national scale.
Locally and regionally it’s the recently announced sale/closure of Farm Fresh, a regional grocer that has been in the Coastal Virginia area for many years. Another is the bankruptcy filing by Southeastern Grocers whose brands include grocers Bi-Lo, Winn Dixie and a few others.
Each of these impacts multiple locations within secondary and tertiary markets, such as Virginia Beach and Chesapeake. If you are a small business owner in a shopping center where the main attraction is suddenly out of business, what can you do?*
Protecting yourself in a lease is similar to insurance — you want to make sure you’re covered before the occurrence of a bad event.
I’m not going to sugarcoat it, there’s probably nothing you can do if this has already transpired, except learn a hard lesson for the future…unless you negotiated a co-tenancy clause into your lease, in which case that may be your only direct recourse (i.e.: your insurance policy).
What exactly is a co-tenancy clause and how can it protect you?
Like I said, it’s an insurance policy…a co-tenancy clause provides some form of recourse for tenant in the event an anchor tenant “goes dark”.
The idea here is that you, small business tenant, picked the location in part because of its proximity to the big business tenant who is attracting a lot of people, who will in turn see and (hopefully) patronize your store because of its convenient location.
If aforementioned big business (ie: Farm Fresh) closes and all their former patrons are now going to the other shopping center with the competing grocery, then your small business is likely to suffer. Hence, the need for an “insurance policy”(aka: co-tenancy clause) in your lease that requires the landlord to provide some relief if the big business shutters.
Okay, but what exactly is an anchor?
Well, that’s debatable — and therefore negotiable in every lease. Typically, an anchor is one of the largest tenants in a center, occupying a significant square footage or percentage of the overall property.
It is usually going to be a household name people are familiar with in your market, and one that drives a lot of traffic (i.e. grocery stores, sporting goods, household goods, hardware, etc.). The definition will be specifically articulated in your lease by either naming the tenant explicitly or listing the square footage requirement or some other criteria that won’t be left open ended.
And, what happens if the anchor tenant goes dark?
The level of protection and severity of consequences is also negotiable and may range from discounting your rent to changing your rent to a percentage of your gross sales in lieu of fixed amount, or the tenant may even have a right to terminate the lease entirely. There will typically be a caveat that the Landlord will have a specific time frame to re-lease the space to another anchor tenant, but if that doesn’t happen within said timeframe the tenant likely would have the right to invoke the co-tenancy clause.
I encourage everyone to go through your lease and look for a section related to Co-Tenancy, so you can be prepared if you find yourself in this unfortunate position. If you don’t see that heading you may want to check the default section or any termination clauses to see if there is relevant language buried in there. Next time you’re up for renewal or opening a new location, maybe this is something you should consider asking for…like an insurance policy, you hope you never need it, but it’s nice to know you have it just in case.
I think most landlords would rather concede some form of co-tenancy clause rather than risk losing your tenancy. On the flipside, if the Landlord isn’t willing to concede this, maybe there’s reason to be concerned with the health of the anchor tenant?
*Editor's note: The author is not an attorney, and this is article is not intended as legal advice. As a real brokerage estate firm, we recommend our clients engage legal counsel for preparation of lease agreements, purchase and sale agreements, and to advise on property rights and landlord/tenant matters.
Originally published on Alignable.com on April 17, 2018
By: Chris Burnett, Commercial Sales & Leasing, Denton Realty Company