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As the list of store closings grows, so does the pain felt by retail landlords, not only because of the loss of some major tenants, but also because of a common but little known clause in retail leases. They are co tenancy clauses. The situation could give independents and others an opportunity to strike better deals on rented retail space.

The clauses allow store owners to take several options, including not paying rent, when key tenants leave a shopping center. The clauses sometimes make leases contingent on certain specific anchor tenants, because those big box stores often drive most of the traffic to smaller stores. Other options triggered by co tenancy clauses can include lease termination, reduced rent for a certain period, or payment of a percentage of sales only.

Lease modifications because of co tenancy ultimately can create a cash flow domino effect for the landlord, said real estate lawyer, Irwin Fayne, a partner at Holland & Knight, who focuses on commercial leasing. The more vacancies that arise in a mall or shopping center, the more co tenancy kicks in. In good times, co tenancy wasn't much of an issue. Anchors could be replaced fairly easily, and often were lined up before the prior retailer had even left. But these are not the best of times, and the situation is expected to get even worse.

With Circuit City, Macy's, Linens 'N Things, Home Depot and others in acknowledged dire financial straits and shuttering stores, the likelihood of easily finding a new big box anchor is increasingly slim. And in some malls and centers, several anchors may be leaving at the same time. That makes co tenancy clauses even more critical.

"When a lot of these tenants got a co tenancy, it was at a time when landlords thought they were safe," said Greg Lotzar, South Florida leasing director for Weingarten Realty Investors, a Houston based real estate investment trust that owns more than 400 malls and centers nationwide. Weingarten and every other retail owner is struggling with co tenancy, Lotzar reported. "Who would have thought you'd have this number of retailers going bust at the same time? If you have a power center with seven anchors and the co tenancy in your leases say at least four of the seven have to be open, who would have thought you'd have that problem?"

The key for landlords and tenants is flexibility, advises Mark Gilbert, EVP of Cushman & Wakefield's investment sales group in Miami. "Landlords don't want to be forced into situations where they remain under the co tenancy threat forever. So the modified approach is that the co tenancy window is open only for so long. Landlords and tenants have agreed that not all tenants suffer in business because another tenant closes," he said.

Big Lots, with 19 stores within 100 miles of Miami, is a case in point. The discount retailer signed a 10 year lease earlier this month for 23,649 square feet of space in the Midvale Plaza shopping center in Tucson. If the occupancy of the center drops below 70 percent and remains at that level for nine months, Big Lots' rent will be reduced 50 percent, said Fayne of Holland & Knight in Fort Lauderdale, who represented landlord, Midvale Marketplace. That reduction doesn't include property management fees or taxes. But Big Lots would get the break for up to a year. After that, the store would have to leave or return to its full payment.

Fayne speculated that Big Lots had cut a similar co tenancy deal in South Florida. "In this market, Big Lots is the 900 pound gorilla and can pretty much dictate how the deal will go," he explained. "Landlords are dying out there and have no choice but to ask, 'how high?' when Big Lots says, 'jump.'"

In Miami, co tenancy questions arose for three remaining anchors at the 105,000 square foot Shoppes at Dadeland, across from the Dadeland Mall, after Linens 'N Things declared bankruptcy last year. Old Navy, Office Depot and the Container Store questioned what recourse they had if a replacement tenant didn't meet conditions in their lease agreements, said Michael Gallinar of Adams Gallinar in Miami, who represents landlord, Hayman Co. of Troy, MI. Issues include preferred replacement tenants, the new tenant's type of business, use of the space and creditworthiness. "You have a list of preapproved parameters and then generic criteria," that existing anchors demand of replacement tenants, he points out. "With the challenge of identifying tenants who will be around, the general criteria becomes all the more important."

At the Fountains of Miramar shopping center in Miramar, FL, former owner, Barry Ross, said anchors, Marshalls, Ross Dress for Less and Office Depot wanted what he called a, "kick out clause," allowing them to leave if any of the other anchors closed. "We said that's not fair, how about if two leave?" he asked. Co tenancy clauses may affect enclosed malls the most, Ross said. Regardless of store size, retailers all seem to have clauses that allow them to cancel leases if a certain percentage of the mall is vacant, or if certain anchors leave.

Because this so concerns landlords, many are willing to cut deals to fill space. Independents that once could not afford space in large malls may now get their foot in the door. Information in this article was excerpted and edited from a story that appeared in Daily Business Review, a Florida real estate trade magazine, and at GlobeSt.com, a news website.

Article ID: 948