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Equal Tenants, Equal Treatment

Most shopping center tenants don't want competing stores at a center, and if forced to accept them, do not want them to be successful. On the other hand, tenants know that successful stores draw customers to a center.

This reasoning may have first led tenants to ask for co-tenancy provisions in their shopping center leases. Co-tenancy provisions generally condition rights or obligations of tenants on the status of their fellow tenants. For example, a tenant may have a right to cease operations at a center if one or more majors at the center cease to operate. Because most co-tenancy provisions relate to operating covenants, tenants usually need a fair amount of negotiating leverage to obtain them in their leases.

Group Exercise Tenants can ask for several types of co-tenancy provisions with regard to operating covenants: First, tenants may request that their initial obligation to open for business at a center be conditioned on a percentage of in-line tenants and majors being open for business as of the tenant's commencement date. A sample standard here would be 75% of in-line tenants and all but one of the majors being open for business as of the tenant's commencement date.

The standards don't necessarily have to distinguish between in-line tenants and majors. The standard might simply be 70% to 80% of all tenants being open for business. Similarly, the parties could decide to base the standard on a percentage of the center's GLA rather than on the number of tenants. For example, a provision could demand that 75% of the center's GLA be occupied by operating tenants.

Second, a tenant may request the right to go dark after opening if a certain percentage of other tenants discontinue operation. Here the standard would likely be similar to the standard for the tenant initially opening, perhaps 70% to 75% of the in-line tenants and two-thirds of the majors remaining open for business.

Such standards often do not require any specific tenants to be part of the group continuing to operate. Instead, the key is usually that enough tenants in general remain operating so that the public continues to shop at the center. As an occasional exception, one or more majors may be identified as being required to continue operations in order for the tenant to share the same obligation.

Third, a tenant may request a right to terminate its lease if certain co-tenancy standards are not met. Since center owners want to resist tenant termination rights at all costs, a standard here might be 50% to 70% of in-line tenants and 50% to 65% of majors operating at the center. Such a termination right might only arise once a tenant initially opens for business. For tenants with more bargaining power, termination rights might also apply at the commencement date of the tenant's initial obligation to open for business.

Cause for termination Co-tenancy provisions may also relate to damage, destruction and condemnation. A lease may require the center owner to rebuild a tenant's premises if the owner elects to rebuild a certain percentage of similarly situated tenants. Here the standard might be 75% to 90% of the in-line tenants located along the same corridor as the tenant.

Also, a lease may require an owner to terminate a tenant's lease if the owner terminates a certain percentage of the leases for tenants in the center. An example would be an obligation to terminate if the owner terminates the leases of 80% to 85% of the center's tenants.

Another area where tenants may request co-tenancy provisions is financial obligations for the center in general. A tenant may request that its monthly requirement to contribute to a promotional fund be conditioned on a certain percentage of other tenants contributing to the fund.

Similarly, a tenant may ask that its payment of a share of special expenses for center expansions or renovations be subject to a certain percentage of other tenants paying their proportional share of such expenses. Such co-tenancy provisions theoretically could apply to any center-wide expense not relating solely to a tenant's individual premises.

Since owners and tenants cannot know how the tenant's store will do when they sign a lease, co-tenancy provisions provide the parties a mechanism to adjust their rights and obligations depending on the success of the center and its other tenants.

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