Overview: Co-tenancy provisions give retail tenants the right to pay reduced rent or to terminate their leases, or both, if other specific tenants or a percentage of tenants do not open or if they leave a shopping center.
A recent Connecticut case called Kleban Holding Company, LLC v. Ann Taylor Retail, Inc. reminds us why, as landlords, to hate co-tenancy. In short, Ann Taylor’s lease provided that if Borders Inc. was not open and operating in the shopping center then Ann Taylor’s minimum monthly rent would abate. Ann Taylor would instead pay 5% of its monthly gross sales – a significant reduction of the rent they had been paying. The abatement period would continue through the expiration of the lease, including any extensions.
As we know, Borders went into bankruptcy and closed its stores. Ann Taylor started paying 5% of its monthly gross sales when that happened. Kleban defaulted Ann Taylor and then filed a lawsuit for, amongst other things, breach of lease. Kleban argued that the lease language gave it a right to substitute Borders for another bookstore and against Ann Taylor’s windfall, but the court ruled in Ann Taylor’s favor stating that the lease’s language was clear that Ann Taylor could abate its rent and pay 5% of its gross sales after Borders went out of business. It was Borders’ closing specifically that gave rise to Ann Taylor’s rent abatement and reduced gross sales-based rent. The Kleban decision is on appeal.
Top 5 Takeaways
1. Avoid co-tenancy provisions if possible. Nothing good can come of them as evidenced by the Kleban case. That being said, there are situations where you will give them because you want the lure of certain tenants. In those cases, follow steps 2-5 below.
2. Draft with absolute accuracy if co-tenancy is unavoidable. Kleban argued that the provision meant something other than what it said. Without getting into the nitty-gritty of the language, that is obviously never a good position to be in as a landlord where the consequences are dismal.
3. Make sure your co-tenancy provision has a quick expiration date. It should never go on as long as the term of your lease or any term extensions or other options.
4. Give yourself relief from the co-tenancy provision. You should be allowed to terminate leases after tenants pay abated rent for a limited period of time.
5. Carve out situations beyond your control. Kleban’s Ann Taylor lease should have said that the co-tenancy provision did not apply where Borders went into bankruptcy or if Borders was evicted for any reason.