What Is a Co-Tenancy Clause in Commercial Real Estate? A Guide for Landlords and Tenants

When leasing retail space in a shopping center, one lease provision that occasionally becomes part of negotiations is the co-tenancy clause. In Commercial Real Estate, co-tenancy provisions are most commonly found in retail leases because the success of some businesses may be influenced by the mix of tenants operating within the same shopping center.

A co-tenancy clause generally addresses what may happen if certain businesses or occupancy conditions within a shopping center change after a lease has been signed. While not every commercial lease includes a co-tenancy provision, understanding what it is and why it is used can help landlords and tenants better understand retail lease negotiations.

This article explains the purpose of co-tenancy clauses, how they generally work, and why they are commonly discussed in commercial real estate.

What Is a Co-Tenancy Clause?

A co-tenancy clause is a provision that may appear in a Commercial Real Estate lease, typically for retail properties, that relates to the occupancy of other tenants within the same shopping center or commercial development.

Rather than focusing only on the leased premises, a co-tenancy provision considers whether certain neighboring businesses or occupancy levels continue to exist after the lease begins.

The exact language and effect of a co-tenancy clause vary from one lease to another.

Why Are Co-Tenancy Clauses Used?

Many retail businesses benefit from operating near other successful retailers.

Shopping centers often rely on a combination of businesses that collectively attract customers. Some tenants believe that neighboring stores contribute to overall customer traffic and the shopping experience.

As a result, co-tenancy provisions may be negotiated to address situations where significant changes occur within the shopping center.

What Is an Anchor Tenant?

Many co-tenancy clauses reference an anchor tenant.

An anchor tenant is generally a large, well-known business that attracts customers to a shopping center.

Examples may include:

• Grocery stores
• Department stores
• Home improvement retailers
• Large discount retailers
• Wholesale clubs
• National fitness centers
• Entertainment venues

The presence of an anchor tenant may increase customer visits to neighboring businesses, although the impact varies depending on the market and the shopping center.

Types of Co-Tenancy Clauses

Although every lease is unique, co-tenancy provisions generally fall into two broad categories.

Opening Co-Tenancy

An opening co-tenancy provision typically relates to conditions that exist before a tenant opens for business.

For example, the lease may describe occupancy conditions that are expected to exist before the tenant's operations begin.

Ongoing Co-Tenancy

An ongoing co-tenancy provision addresses conditions that may occur after the tenant has opened.

For example, the provision may describe what happens if certain occupancy conditions change during the lease term.

The specific requirements depend entirely on the negotiated lease language.

Common Conditions Referenced in Co-Tenancy Clauses

Every lease is different, but co-tenancy provisions may refer to items such as:

• The continued operation of an anchor tenant
• A minimum occupancy level within the shopping center
• The presence of specific national retailers
• The opening of neighboring tenant spaces
• The replacement of an anchor tenant with another qualifying business

The exact conditions vary from property to property and are determined during lease negotiations.

Why Co-Tenancy Matters in Retail Leasing

Retail businesses often consider more than just the individual leased premises.

Factors commonly evaluated include:

• Customer traffic
• Tenant mix
• Nearby retailers
• Visibility
• Accessibility
• Parking
• Anchor tenants
• Shopping center occupancy
• Complementary businesses

For some retailers, the overall environment of the shopping center is an important part of the location decision.

Does Every Retail Lease Include a Co-Tenancy Clause?

No.

Many commercial leases do not contain co-tenancy provisions.

Whether a co-tenancy clause is included often depends on factors such as:

• Property type
• Shopping center size
• Tenant type
• Market conditions
• Bargaining positions of the parties
• Lease negotiations

National retailers are generally more likely to negotiate detailed lease provisions than smaller businesses, although every transaction is different.

Co-Tenancy Is Different from an Exclusive Use Clause

These two provisions are sometimes confused, but they address different issues.

A co-tenancy clause focuses on the occupancy or operation of other tenants within the shopping center.

An exclusive use clause generally addresses competition by limiting whether certain competing businesses may operate within the same property.

Both provisions may appear in retail leases, but they serve different purposes.

Shopping Centers Often Depend on Tenant Mix

Commercial real estate professionals frequently evaluate a shopping center's tenant mix, which refers to the combination of businesses operating within the property.

A balanced tenant mix may include:

• Restaurants
• Coffee shops
• Grocery stores
• Fitness centers
• Medical offices
• Personal service businesses
• Banks
• Specialty retailers
• Entertainment businesses

The combination of tenants helps define the character and customer appeal of a shopping center.

How a Commercial Real Estate Broker Can Help

A knowledgeable Commercial Real Estate Broker can help landlords and tenants understand the business terms commonly negotiated in retail leases.

A broker may assist by:

• Identifying shopping centers that align with a tenant's business concept
• Comparing commercial lease proposals
• Explaining common retail lease terminology
• Coordinating property tours
• Discussing tenant mix and shopping center characteristics
• Assisting with business negotiations
• Facilitating communication throughout the leasing process

Because every retail property is different, brokers often help clients compare multiple locations before entering into lease negotiations.

Final Thoughts

A co-tenancy clause is a commercial lease provision that may address how changes in a shopping center's occupancy or tenant composition relate to the lease. These clauses are most commonly associated with retail commercial real estate, where neighboring businesses and anchor tenants can influence the overall character of a shopping center.

Although not every lease contains a co-tenancy provision, understanding how these clauses generally work can help landlords, tenants, and commercial real estate professionals better understand retail lease negotiations. Like many commercial lease terms, the specific language and effect of a co-tenancy clause depend on the individual agreement negotiated between the parties.

Frequently Asked Questions

What is a co-tenancy clause in commercial real estate?

A co-tenancy clause is a provision in some commercial leases—most commonly retail leases—that addresses certain occupancy conditions or the continued operation of other tenants within the same shopping center.

Where are co-tenancy clauses most commonly used?

They are most frequently found in shopping centers, lifestyle centers, and other multi-tenant retail developments where the mix of businesses may influence customer activity.

What is an anchor tenant?

An anchor tenant is typically a large, well-known business that attracts customers to a shopping center, such as a grocery store, department store, home improvement retailer, or national fitness center.

Is a co-tenancy clause the same as an exclusive use clause?

No. A co-tenancy clause relates to the occupancy or operation of other tenants within the shopping center, while an exclusive use clause generally limits whether certain competing businesses may operate within the same property.

Does every retail lease include a co-tenancy clause?

No. Many commercial leases do not contain co-tenancy provisions. Whether one is included depends on the property, the parties involved, market conditions, and the negotiated lease terms.

Why do retailers pay attention to tenant mix?

The combination of businesses within a shopping center may influence customer traffic, shopping patterns, and the overall character of the property. Tenant mix is one of many factors considered during site selection.

How can a Commercial Real Estate Broker help?

A Commercial Real Estate Broker can help identify suitable retail properties, explain common lease terminology, compare shopping centers, discuss tenant mix, coordinate property tours, and assist throughout the commercial leasing process.