Cotenancy Agreement

Overview

A Cotenancy Agreement is a provision found in many commercial lease agreements, particularly in shopping center leases, which grants tenants certain protections and options if major retailers or specified neighboring tenants go dark, i.e., cease operations. The intent is to protect tenants from a decrease in foot traffic, loss of business, or other adverse effects that might result from the closure of major anchors or key tenants in the shopping center.

Key Features

Trigger Event: The agreement specifies certain tenants whose continuing operation directly impacts the lease terms for another tenant.
Rent Adjustments: If a cotenant ceases operations, the affected tenant may have the right to reduce their rent.
Altered CAM Payments: Common Area Maintenance (CAM) fees might also be adjusted proportionally.
Lease Termination: The provision may allow the affected tenant to terminate their lease if the specified vacancy continues for a defined period.

Example

For instance, consider Rooms from Heaven, a tenant in a shopping center, with High Store and Low Places as named cotenants. The Cotenancy Agreement stipulates that if either High Store or Low Places goes dark:

Rooms from Heaven can reduce its rent by 50%.
Eliminate payments for common area maintenance.
Terminate its lease if the landlord does not find a satisfactory replacement within one year.

Frequently Asked Questions (FAQs)

What is the purpose of a Cotenancy Agreement?

The primary purpose is to protect tenants against the negative impacts, such as reduced customer traffic, caused by the closure of major tenants in the shopping center.

Can a landlord refuse to include a Cotenancy Agreement?

Yes, it depends on the negotiating power of the tenant and landlord. Larger, financially stable tenants usually have more leverage to demand cotenancy protections in their lease agreements.

How long must a cotenant be dark before lease termination options are available?

The specific duration varies based on the terms stipulated in the lease agreement, but common practice is often six months to one year.

Are Cotenancy Agreements common in all types of commercial leases?

They are more common in retail leases within shopping centers, especially those involving anchor tenants that attract significant foot traffic.

Yes, a lease can list several anchor or major tenants whose closure might trigger the agreement’s provisions.

Anchor Tenant: A major tenant in a shopping center who drives significant customer traffic and business.
Going Dark: A term used when a retailer ceases operations but still holds a lease.
Common Area Maintenance (CAM): Fees tenants pay for the upkeep of common areas in a retail center.
Lease Termination Clause: A clause that details the circumstances and process through which a lease agreement may be ended.
Retail Leasing: The practice of leasing space for retail purposes within a commercial setting.

Online Resources

References

Brown, David M., et al. Retail Leasing: Policies, Practices, and Concepts. Urban Land Institute, 2010.
Harcourt, Bill. Commercial Property Lease Agreements: A Practice Manual. Self-Published, 2018.

Suggested Books for Further Study

Rubin, Michael. Being a Landlord in a Commercial Market. Good Book Company, 2022.
Campbell, Denis. Commercial Real Estate Leases: Selected Issues in Drafting and Negotiating the Lease. American Bar Association, 2020.
Wiley, Brett. Tenants’ Rights in Commercial Property. McGraw-Hill, 2019.

Real Estate Basics: Cotenancy Agreement Fundamentals Quiz

### What is a Cotenancy Agreement commonly used for in commercial leases? - [x] To protect tenants from the negative impacts if neighboring tenants go dark. - [ ] To increase CAM payments for non-complying tenants. - [ ] To primarily benefit landlords by securing rental income. - [ ] To allow unlimited operational changes for tenants. > **Explanation:** Cotenancy Agreements are primarily used to protect tenants in the event of neighboring tenants ceasing operations, by ensuring measures like rent adjustments or lease termination options. ### What happens if a major cotenant in a shopping center goes dark according to a standard Cotenancy Agreement? - [x] The tenant can reduce rent and possibly terminate their lease. - [ ] The tenant must increase their contributions to common area maintenance. - [ ] Nothing changes for the tenant. - [ ] The tenant is required to pay a penalty to the landlord. > **Explanation:** If a major cotenant goes dark, a standard Cotenancy Agreement allows the affected tenant to reduce their rent and might allow them to terminate their lease if the situation persists. ### What term is used to describe when a retailer ceases operations but retains their lease? - [ ] Shopping Overhaul - [x] Going Dark - [ ] Lease Inactive - [ ] Tenant Shutdown > **Explanation:** The term used is "Going Dark," which indicates that the retailer has ceased operations while still under a lease agreement. ### What specific advantage does a Cotenancy Agreement provide to a tenant? - [x] Rent reduction and potential lease termination. - [ ] Unlimited re-negotiation rights of lease terms. - [ ] Increased flexibility in business operations. - [ ] Automatic lease renewals. > **Explanation:** A Cotenancy Agreement provides the tenant with specific advantages like rent reduction and potential lease termination in the event that specified tenants go dark. ### In a Cotenancy Agreement, what are CAM fees typically adjusted in response to? - [x] Neighboring tenants going dark. - [ ] Increased foot traffic in the shopping center. - [ ] Change in property management companies. - [ ] Market rent adjustments. > **Explanation:** CAM fees are typically adjusted in response to neighboring tenants going dark to mitigate financial burdens on remaining tenants. ### Which type of tenant frequently leverages their negotiating power to secure a Cotenancy Agreement? - [x] Anchor tenants or financially strong tenants. - [ ] Small independent retailers. - [ ] Start-up businesses with no track record. - [ ] Tenants with short-term leases. > **Explanation:** Anchor tenants or financially strong tenants often leverage their negotiating power to secure favorable terms like a Cotenancy Agreement due to their importance in driving traffic and business. ### Current tenants may seek to include a Cotenancy Agreement primarily for what purpose? - [x] Protect against the loss of business due to key tenants going dark. - [ ] Receive higher rental income from subleasing. - [ ] Ensure perpetual renewals of their lease. - [ ] Secure space for future expansions. > **Explanation:** The primary purpose is to protect against loss of business that might result from the closure of key tenants within the shopping center. ### How is rent affected in a Cotenancy Agreement when a named cotenant ceases operations? - [x] The rent is significantly reduced. - [ ] The tenant must immediately pay the full annual rent. - [ ] There are no changes to rent amounts. - [ ] The tenant pays no rent for the remainder of the lease. > **Explanation:** The rent is significantly reduced to compensate the tenant for the potential loss in business due to reduced foot traffic. ### When is a Cotenancy Agreement typically implemented in the leasing process? - [x] During the lease negotiation phase. - [ ] At the end of a lease term. - [ ] After signing the lease. - [ ] During property handover. > **Explanation:** A Cotenancy Agreement is typically implemented during the lease negotiation phase when terms and conditions are being established. ### What role does a landlord have in regard to a Cotenancy Agreement? - [ ] Obliged to reduce rent across the board. - [x] Ensuring compliance and finding replacements for dark tenants. - [ ] Removing tenants who demand such agreements. - [ ] Increasing overall rentable space. > **Explanation:** The landlord's role includes ensuring compliance with the agreement and finding replacements for dark tenants to maintain the property's value and attractiveness.