Keepin' It Tight With Co-tenancy Clauses

• Published date: 23 June 2020
• Subject Matter: Real Estate and Construction, Landlord & Tenant - Leases
• Law Firm: WeirFoulds LLP
• Author: Mr Karsten Lee and Robert Eisenberg

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Karsten Lee and Robert Eisenberg discuss the application of co-tenancy clauses in lease agreements, touching on the issues raised in the insolvency cases of Target and Sears in Canada, and providing tips for ensuring your agreement is tight and enforceable.

Transcript

Narrator: You're listening to season two of WeirTalking Leasing, a podcast series from WeirFoulds LLP's commercial leasing lawyers in Ontario, Canada. In these first few episodes of the season, our speakers cover topics including co-tenancies, distribution leases, and changes to construction legislation that impact leases and construction projects. Now on to the episode.

Karsten Lee: All right, welcome to the WeirTalking Leasing podcast, a podcast about everything you need to know about commercial leasing brought to you by WeirFoulds. My name is Karsten Lee, I'm a partner here at WeirFoulds, and joining me today is Robert Eisenberg, who is an associate here at WeirFoulds as well.

Robert Eisenberg: It's a pleasure to be here, Karsten.

Karsten Lee: So today, what we're going to be speaking about are co-tenancies. Now, the issues about co-tenancies are in the forefront over the past few months due to the recent retail insolvencies that have been coming through the industry. So for example, when Target or Sears went bankrupt, this raised the issues for landlords as well as many other tenants who had co-tenancy clauses, and how these co-tenancy clauses are actually triggered and how they're used, and why they're there to begin with. So Rob, why don't you tell us exactly what a co-tenancy clause is, first?

Robert Eisenberg: Well, I'd be happy to. So basically, a co-tenancy clause, it's a requirement for minimum occupancy of a development or a shopping centre or a building or something like that. And if those minimum thresholds are not met, then a tenant gets a benefit. So you know, either a right to terminate, or a right to go dark, or rent abatement, something like that. There are two major kinds of co-tenancies that we most frequently see. Those are opening co-tenancies and ongoing co-tenancies. So an opening co-tenancy usually means that something has to happen before a tenant is obligated to open for business or commence paying rent. And an ongoing tenancy is where a tenant is open, but then if something happens or doesn't happen, then the tenant gets to decide to exercise his rights or not.

Karsten Lee: So let's build on that for a second. So you're saying, in an opening co-tenancy, something has to happen. So what exactly is that something?

Robert Eisenberg: So usually an opening co-tenancy will be, I am usually not quite an anchor tenant of a centre. I'll come in, I'll be the second-tier tenant and I'll want to say, "Look, this is a new development. I don't want to be the first guy open here, because that just means I'm taking on the risk. I don't have the benefit of other people driving traffic to my store." So what I say is, "Look. Until the anchor tenant opens, whatever it is, a grocery store, a gym, whatever it is, until they open, then I don't have to open." Or you can say, "If they don't open by this date, then I might have to open, but I don't have to pay rent until they open." So it's basically a precondition before the full terms of the lease kick in.

Karsten Lee: And just to build on that, it's not necessarily just the anchor tenant or two anchor tenants opening before the opening co-tenancy kicks in. It may well be, that tenant requires, say, 75 percent of the shopping mall to be open and operating before they're obligated to open.

Robert Eisenberg: Absolutely. Then the possibilities are endless. You draw up a site plan, you can say, "Within this area, this number of tenants have to be open." You can say, "You have to have three anchors over 10,000 square feet and then 70 percent of the rest of the CRU tenants open." I mean, it's really a business decision what the actual co-tenancy requirement is. It's just, the possibilities are endless.

Karsten Lee: So that's the opening co-tenant. We don't have to open unless a certain number of tenants or a certain couple of tenants are open and operating. On the second type of co-tenancy, which is the ongoing co-tenancy, what's an example of that?

Robert Eisenberg: So the ongoing co-tenancy, the rationale behind it is a little bit different. It's there to protect tenants from being left holding the bag if things go south for the development. So let's say I'm a tenant in the centre and I'm going to say, in my ongoing co-tenancy, and it might be in addition to an opening co-tenancy; sometimes it's either/or sometimes there's both. But I'd say something like, "If at any point, less than 80 percent of the square footage of the shopping centre is open for retail purposes, then I don't have to open, or then I don't have to pay rent." Or I can say, "If at any time an anchor tenant isn't open, then I don't have to open or I don't have to pay rent."

Robert Eisenberg: And we can get into this in a little bit more detail, but that has been one of the major issues with, as you mentioned, the Target bankruptcy and the Sears bankruptcy, where other tenants had ongoing co-tenancy clauses tied specifically to those tenants, which we'll get into. But that makes it really difficult for landlords. And it's one of the biggest dangers about having poorly drafted co-tenancy clauses, is your inability to cure the default.

Karsten Lee: Okay. So before we get into the nitty gritty of the co-tenancy clause itself, why would a party want a co-tenancy clause to begin with?

Robert Eisenberg: So let me start with the tenants because I think it's a little bit more obvious. Co-tenancies are most useful in two main contexts. The first is for a new development or a new shopping centre. And having co-tenancies here ensures that you being the tenant are not the first...