Don’t Let Anchor Replacement Ambiguity Lead to Co-Tenancy Termination

Strong retail tenants often command a co-tenancy clause giving them the right to terminate the lease if an anchor moves out of the shopping center. One common strategy that landlords use to limit the risks these co-tenancy termination rights is to bar the tenant from exercising them for a certain period of, say, six months after the anchor leaves. This gives the landlord a window to find a replacement anchor before co-tenancy termination rights kick in. Unfortunately, this may not provide as much protection as the landlord expects.  

What’s the Loophole?

The fatal flaw in this strategy is lack of agreement over what the landlord must actually do to keep the tenant from terminating. The landlord may assume that simply getting a replacement to sign a lease within six months is enough. But the tenant may interpret the clause as requiring the replacement anchor to actually move in and start operating within that time. And, if the lease language isn’t clear, a court may side with the tenant.

The owner of a Connecticut shopping center learned that lesson the hard way. The lease said that a tenant could terminate if a department store stopped operating in the center for six months, but it also said that termination would not be permitted if the landlord replaced the department store with a “comparable department store” within those six months. The good news for the landlord is that it got a comparable store to sign a lease before the six-month window expired; the bad news is that the replacement store didn’t actually open for business within that time. 

So, the tenant exercised its co-tenancy termination rights and the landlord sued. Its argument: While not expressly explained in the lease, both sides understood that replacing the outgoing department store with an operational store within six months was “commercially impractical.” Consequently, the clause required the landlord to get the replacement to sign a lease within six months. 

But the court disagreed. Absent a specific lease definition, the tenant and court were free to interpret “comparable department store” to mean a store that was operating. And since the replacement wasn’t operating, the tenant was entitled to terminate the lease [Rubin v. Venator Group Retail Inc., No. CV 990090813, 2000 WL 486960 (Conn. Super. Ct.)].  

How to Plug the Loophole

Don’t make the same mistake. If you can’t avoid granting co-tenancy termination rights, don’t settle for a clause that merely gives you time to secure a replacement without addressing what that actually entails. Make it clear that your obligation is only to get the replacement to sign a lease for the space regardless of whether it actually moves in and opens for business within that time. In addition to providing more meaningful protection from co-tenancy termination, such clear language will compel the tenant to show its hand and either accept or negotiate the co-tenancy provision. In either case, you’ll avoid the kinds of communication disconnect that can lead to litigation the way the clause in Rubin did. 

Model Lease Language

Tenant may exercise its option to terminate the Lease, as provided in Paragraph __ of this Lease, only in the event that Landlord does not sign a lease with a replacement [insert type of store, e.g., department store] within [insert time, e.g., six (6) months] after [insert name of current anchor store in the space] ceases operations at the Center.