The Playbook / Clause 3
Co-Tenancy
Opening Co-Tenancy; Ongoing Co-Tenancy; Anchor and Occupancy Conditions
The Co-Tenancy clause conditions the tenant’s rent obligation and continued occupancy on the presence of other named tenants (typically anchor tenants) or a minimum occupancy threshold at the project. Opening Co-Tenancy operates at delivery and rent commencement; Ongoing Co-Tenancy operates throughout the term. Both conditions trigger remedies (typically alternate rent during the breach and, after sustained breach, termination) designed to track the value the tenant has lost relative to what was bargained for at signing.
What the landlord’s form is doing
Landlord resists co-tenancy entirely or, if forced to concede, narrows the named anchors, raises the occupancy threshold trigger, limits the cure window, caps alternate-rent duration, and treats anchor replacement (a comparable replacement standard) as automatic cure. Landlord pushes back hardest on termination remedies, which California courts have invalidated as penalties when there is no proportionality to actual damage.
Landlord may seek to make the co-tenancy provision personal to the originally named tenant, to limit the alternate-rent period before reverting to full rent, and to require the tenant to reopen and continue operating during any breach period.
Anticipate a proof-of-damage precondition: landlord-side model clauses condition any co-tenancy remedy on the tenant first demonstrating that its gross sales declined during a defined ninety-day violation period by more than a stated percentage, net of both industry-wide declines and the tenant’s own historical trend.
Anticipate the full landlord toolkit for diluting co-tenancy remedies: size-only definitions of “major store” that widen the pool of acceptable replacements, lengthened cure periods, caps on the duration of substitute rent, proof-of-sales-decline preconditions, and conversion of termination rights into rent relief. Landlord-published termination limits likewise require the tenant to prove a stated business loss (e.g., ten percent) over a twelve-month replacement window and reserve a landlord right to nullify the tenant’s termination if a substitute tenant opens during the notice period.
What tenants should watch for
Building the condition
Opening Co-Tenancy. Condition tenant’s obligation to open on (a) named anchors being open and operating and (b) a minimum occupancy threshold of the project’s leasable area (e.g., [70%]) being leased to open and operating tenants. Remedies if unmet at scheduled delivery: tenant’s option to (i) delay opening with rent abatement, (ii) open and pay alternate rent (e.g., percentage rent only) until cure, or (iii) terminate after a window (e.g., 9–12 months).
Ongoing Co-Tenancy. Alternate rent if anchors close or occupancy drops below the threshold for a sustained period (e.g., 60–90 days), with termination right if the condition continues for [12] months. Replacement standard: a “comparable replacement tenant” should be defined by reference to the named anchor’s brand stature, size, and use, not merely a same-category tenant of any size.
Rollover. Provide that an uncured opening co-tenancy failure rolls into the ongoing co-tenancy remedy structure once tenant opens, rather than lapsing upon opening.
Trading a continuous-operation covenant. If Landlord insists on a continuous-operation covenant, trade acceptance of that covenant for co-tenancy-style protections: termination, percentage-rent-only, or go-dark rights if named anchors close or center-wide occupancy falls, including reimbursement of the unamortized cost of the tenant’s leasehold improvements upon a co-tenancy termination.
Replacement and remedy design
Drafting trap. A comparable replacement clause without an objective standard or a tenant-approval right can read all teeth out of the co-tenancy.
Define “replacement” as open and operating. Define anchor “replacement” to require the substitute to be open and operating within the cure window. Landlord-side drafting responds to Rubin v. Venator Grp. Retail, Inc., 27 Conn. L. Rptr. 62, 2000 WL 486960, at *1 (Super. Ct. Apr. 3, 2000), which held that a replacement that had signed a lease but had not opened did not defeat the tenant’s termination right where the lease was silent, by providing that merely signing a replacement lease suffices; the tenant should insist on the opposite formulation.
Penalty risk. Tie alternate rent to objectively measurable harm so it cannot be attacked as an unenforceable penalty. In Grand Prospect (California), a zero-rent abatement was struck as an unreasonable penalty because the tenant anticipated no harm from the anchor vacancy, while the tenant’s separate termination right was upheld. Percentage-rent structures that track sales are the cleanest defense for the rent remedy.
Structure alternate rent to survive a penalty challenge. In JJD-HOV Elk Grove, LLC v. Jo-Ann Stores, LLC (Cal. 2024), the California Supreme Court upheld a substitute-rent formula (the greater of 3.5 percent of gross sales or a fixed monthly floor) as valid alternative performance because it realistically resembled the tenant’s actual damages from reduced anchor occupancy and the landlord retained a realistic ability to restore occupancy, distinguishing the zero-rent abatement invalidated in Grand Prospect. A percentage-of-sales formula with a dollar floor is materially more defensible than total rent elimination.
Resist proof-of-sales-decline preconditions. Resist proof-of-sales-decline preconditions to co-tenancy remedies; they delay the remedy, force disclosure of sales data, and convert an occupancy condition into a damages dispute. If a sales test is unavoidable, negotiate a single objective benchmark and a short verification window, and confirm the remedy runs from the date of the violation rather than from completion of the proof.
Living with the clause
Monitor co-tenancy triggers and invoke remedies promptly. A tenant that continued paying full rent for two and one-half years after an anchor closed could not retroactively recapture its rent reductions, while a renewing tenant that expressly reserved its rights under a lease barring implied waiver preserved its accrued abatement. Pair a no-implied-waiver clause with an express reservation of rights in any renewal or amendment, and calendar ongoing occupancy monitoring.
How this typically gets negotiated
Co-tenancy negotiations center on the trigger (which anchors or what occupancy percentage), the remedy while the condition fails (how deep the rent relief goes), what counts as a comparable replacement tenant, and how long a failure must persist before the tenant may terminate. Landlords resist opening co-tenancy hardest; tenants with leverage get both opening and ongoing protection.
The specific language that resolves each of these points depends on the deal. Talk to Paul about your lease →
How the states treat it
Majority rule. Most jurisdictions enforce commercial co-tenancy provisions between sophisticated parties. Co-tenancy termination remedies, however, draw closer scrutiny: courts increasingly evaluate whether the termination remedy bears a reasonable relationship to actual injury.
Minority and notable variants: California. California evaluates each co-tenancy remedy separately under its penalty doctrine, and the leading case cuts both ways. In Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc., 232 Cal. App. 4th 1332, 182 Cal. Rptr. 3d 235 (2015), as modified on denial of reh’g (Feb. 9, 2015), the court struck a zero-rent abatement as an unreasonable penalty (the tenant anticipated no harm from the anchor vacancy) but upheld the tenant’s termination right, because terminating on an agreed contingency unrelated to either party’s default is not a forfeiture (“[W]hether a cotenancy provision is unconscionable or an unreasonable penalty depends heavily on the facts proven in a particular case. Here, the facts show the provisions were not unconscionable and only the ‘rent abatement provision’ operated as an unreasonable penalty.”). The California Supreme Court has since upheld a percentage-rent co-tenancy remedy as valid alternative performance. JJD-HOV Elk Grove, LLC v. Jo-Ann Stores, LLC, No. S275843 (Cal. Dec. 19, 2024)
Notable cases
Grand Prospect Partners, L.P. v. Ross Dress for Less, Inc., 232 Cal. App. 4th 1332, 182 Cal. Rptr. 3d 235 (2015), as modified on denial of reh’g (Feb. 9, 2015). A zero-rent co-tenancy abatement was an unreasonable penalty where the tenant anticipated no harm from the anchor’s absence yet would have forfeited roughly $39,500 in rent per month; the tenant’s option to terminate after a twelve-month reduced-occupancy period was enforceable, because termination on an agreed contingency unrelated to any party’s default is not a forfeiture
JJD-HOV Elk Grove, LLC v. Jo-Ann Stores, LLC, No. S275843 (Cal. Dec. 19, 2024). The California Supreme Court upheld a co-tenancy substitute-rent provision as valid alternative performance rather than a penalty, because the lease reserved the landlord a realistic and rational choice (maintain anchor occupancy and collect full rent, or accept reduced rent) distinguishing Grand Prospect
Rubin v. Venator Grp. Retail, Inc., 27 Conn. L. Rptr. 62, 2000 WL 486960, at *1 (Super. Ct. Apr. 3, 2000). A replacement anchor that had signed a lease but had not yet opened for business did not defeat the tenant’s co-tenancy termination right where the lease did not say a signed lease sufficed; absent contrary language, a replacement must be open and operating
Boca Park Marketplace Syndications Grp., LLC v. Ross Dress for Less, Inc., No. 216CV01197RFBPAL, 2019 WL 2563814, at *1 (D. Nev. June 20, 2019), amended, No. 216CV01197RFBBNW, 2020 WL 2892586 (D. Nev. May 31, 2020). A co-tenancy rent reduction triggered when major-tenant occupancy fell below seventy percent was not unenforceable liquidated damages; the clause set a fair rental value for diminished conditions rather than remedying a breach
Madison Holdings, LLC v. Cato Corp., No. W202200685COAR3CV, 2023 WL 4103130, at *1 (Tenn. Ct. App. June 21, 2023). A lease renewal did not waive the tenant’s accrued co-tenancy rent abatement arising from the anchor’s departure, where the tenant expressly reserved its rights at renewal and the lease required any waiver to be in a signed writing
Michaels Stores, Inc. v. Sun Life Assurance Co. of Canada, 413 F. Supp. 3d 854, 2019 WL 4645448 (D. Minn. 2019). A tenant that continued paying full rent for two and one-half years after an anchor closed waived its accrued co-tenancy rent reductions and could not exercise the reduction retroactively
Game film: real clauses from real leases
Excerpts from commercial leases filed as exhibits with the Securities and Exchange Commission, trimmed for length. Follow the citation for the full document on EDGAR.
“Landlord guarantees that as of the date Tenant is ready to open its business in the Leased Premises, (1) Books A Million … (occupying a minimum of fifteen thousand [15,000] square feet), and (2) Publix Supermarket … shall be open and operating in a fully stocked and staffed condition and as a full-price retailer (as opposed to a ‘discount’ or ‘outlet’ version of such retailer) …. In the event that both Opening Co-Tenancy Requirements are not satisfied at the time of Tenant’s opening … Tenant may, at its option, pay, in lieu of Minimum [Rent] and all other rents and charges due hereunder, two percent (2%) of Gross Sales …. [I]f either Opening Co-Tenancy Requirement remains unsatisfied on April 1, 2013 … Tenant may elect to (a) terminate this Lease upon thirty (30) days written notice to Landlord …. If Tenant elects to terminate … Landlord shall reimburse Tenant for all costs related to Tenant’s Work.”
Why it matters. This is the full tenant wish list in operation: named anchors with minimum square footage, a full-price (not outlet) operating standard, percentage alternative rent, and an outside date that converts to a termination right with reimbursement of the tenant’s build-out costs.
“[I]f during the Term hereof, the occupancy of in-line, retail tenants falls below 70% (the ‘Occupancy Failure’) and (i) such Occupancy Failure continues for six (6) months, and (ii) Tenant’s Net Sales from the Leased Premises during such 6 month period are at least 10% less than such Net Sales for the same 6 month period in the previous calendar year, then … Tenant shall have the right … to pay to Landlord, in lieu of Minimum Annual Rental and Percentage Rental and all additional rental (except utilities), an amount equal to 6% of Net Sales for each and every month (‘Substitute Rent’). … In the event the Occupancy Failure continues for an additional 12 consecutive months, then Tenant shall have the right to terminate this Lease by written notice to Landlord.”
Why it matters. The landlord conditioned the remedy on proof of an actual sales decline, the compromise discussed above, and the clause carries a use-it-or-lose-it trap: if the tenant misses the termination window, the right to pay Substitute Rent ends and full rent resumes.
“Tenant shall have the one-time option to terminate the Lease (the ‘Termination Option’) without penalty or cost in the event that the combined rentable square footage collectively occupied by both FLOWSERVE and/or CURTISS-WRIGHT (and/or either and/or both of their affiliates, successors and/or assigns) in Building 20 of the Phillipsburg Commerce Park becomes less than thirty-five thousand (35,000) rentable square feet (each, a ‘Co-Tenancy Failure’) …. Tenant shall give Landlord no less than six (6) months prior written notice … not later than thirty (30) days after Landlord delivers written notice to Tenant of the occurrence of a Co-Tenancy Failure, time being of the essence.”
Why it matters. Co-tenancy is not only a retail concept. Here an office-park tenant tied its lease to the continued presence of two named neighbors, with a thirty-day exercise window that demands close calendar management.