You signed a lease in a grocery-anchored strip mall because the foot traffic was good. The Publix two doors down brought 4,000 customers a week past your storefront. Your projections assumed that traffic would continue.
Then the Publix closed.
If your lease has a co-tenancy clause, you have options — reduced rent, a termination right, or both. If it doesn't, you're paying full rent in a center that now draws a fraction of the foot traffic it did when you signed. The lease doesn't care that your sales dropped 40%.
A co-tenancy clause is a lease provision that gives you rent relief or termination rights if the retail ecosystem around you changes materially — specifically, if an anchor tenant leaves, if overall center occupancy drops below a defined threshold, or both.
The clause recognizes a basic reality of retail: your rent was priced assuming certain conditions. You agreed to $28/SF because a high-traffic grocery store drove customers to your door. If that anchor leaves and foot traffic collapses, the economic basis for that rent has changed. The co-tenancy clause is the contractual mechanism that addresses that change.
Most landlord-drafted leases don't include one. It's a tenant ask, and landlords resist it for legitimate reasons — they can't control what anchor tenants do, and a co-tenancy clause can trigger a cascade of rent reductions and terminations that destabilizes the entire property. But for retail tenants whose business depends on anchor-driven traffic, it's one of the most valuable clauses in the lease.
Co-tenancy clauses come in two forms, and knowing the difference matters when you're negotiating.
An opening co-tenancy clause applies before or at the start of your lease. It says you won't pay full rent — or won't be required to open at all — until certain anchor tenants are open and operating. If you're signing a lease in a new development and the landlord is promising a Whole Foods anchor that hasn't opened yet, an opening co-tenancy clause protects you from paying full rent while anchoring an incomplete center that hasn't yet generated the traffic you were promised.
An operating co-tenancy clause — the more common type — applies during the lease term. It says that if a defined anchor tenant closes, or if overall center occupancy drops below a specified percentage (typically 75–85%), your rent reduces to an agreed alternative rate or you get the right to terminate.
Both types should be in your lease if you're a retail tenant whose business depends on traffic generated by neighboring tenants.
Co-tenancy remedies vary by negotiation, but the most common structure works like this: the anchor tenant closes, a cure period begins (typically 12–18 months for the landlord to find a replacement), and if no suitable replacement is operating by the end of that period, your rent drops to an alternative rate — often 50% of base rent, or a percentage of gross sales, whichever is greater.
Here's a real example from a grocery-anchored center in suburban Atlanta. A national clothing retailer occupying 10,000 square feet had a co-tenancy clause tied to the center's anchor grocery store. When the grocer vacated, the retailer's clause triggered immediately: rent reduced by 50% — from $20/SF to $10/SF annually — with the right to terminate entirely if a replacement anchor wasn't secured within 12 months.[A.CRE] The retailer exercised the rent reduction immediately and monitored the replacement timeline.
On a 10,000 square foot space, the difference between $20/SF and $10/SF is $100,000 per year. That's real money that kept a retailer viable through a difficult transition period rather than forcing an early default.
Co-tenancy clauses have been litigated, and the legal landscape matters when you're drafting one.
In a recent decision, the California Supreme Court decided JJD-HOV Elk Grove LLC v. Jo-Ann Stores, LLC — a case directly addressing whether co-tenancy rent reductions are enforceable or constitute illegal penalties under California law. Jo-Ann Stores had a co-tenancy clause allowing them to pay a substitute rent equal to the greater of 3.5% of gross sales or $12,000/month if the co-tenancy condition wasn't satisfied. When the anchor tenant closed, Jo-Ann paid the substitute rent instead of fixed minimum rent. The landlord sued for over $600,000 in alleged unpaid rent, arguing the co-tenancy clause was an unenforceable penalty.
The California Supreme Court held that the co-tenancy provision was not a penalty but an alternative performance structure — the landlord had a rational choice between two reasonable alternatives: ensure continued anchor presence and receive full rent, or allow occupancy to fall and receive the agreed reduced rent.[Thompson Coburn LLP]
The ruling clarified that well-drafted co-tenancy clauses are enforceable in California when they reflect an arms-length negotiation between sophisticated parties and the reduced rent represents a genuine alternative rather than a punitive measure. Florida courts have similarly enforced co-tenancy provisions when they are unambiguous and material terms of the lease.
The practical implication: how you draft the clause matters. A co-tenancy provision that's clearly tied to an alternative rent structure is more likely to be upheld than one that reads as a pure penalty for anchor vacancy.
Not all co-tenancy clauses provide equal protection. Landlords who are forced to include one will often negotiate terms that make it difficult to trigger or that limit the remedies available.
A strong co-tenancy clause specifies the anchor tenant by name and by use category — "Publix Supermarkets or a comparable grocery store of not less than 40,000 square feet" — rather than just by name alone. If the clause only names the specific tenant and that tenant is acquired or rebrands, the protection may not survive.
It defines what "open and operating" means. An anchor that technically holds its lease but has gone dark — lights off, no customers — shouldn't satisfy a co-tenancy requirement. The clause should specify that the anchor must be open for regular business operations, not merely in possession of the space.
It includes a cure period of 12 months (not longer), after which your remedy kicks in automatically without further notice or action required on your part. Longer cure periods — some landlords push for 24 months — leave you paying full rent through an extended vacancy.
It defines the replacement anchor clearly enough that the landlord can't satisfy it with a pop-up shop or a temporary tenant. Specify minimum square footage, minimum lease term for the replacement, and use category.
It gives you the right to terminate — not just reduce rent — if the co-tenancy condition remains unsatisfied after the cure period. A rent reduction without a termination right leaves you in a damaged center indefinitely at reduced but still above-market rent.
Landlords don't accept co-tenancy clauses without conditions. Understanding what they'll push for helps you know where to hold firm and where to give ground.
Most landlords will insist that you cannot invoke a co-tenancy remedy while you're in default on your lease. That's reasonable — you shouldn't be able to use anchor vacancy as cover for your own non-payment. Agree to this.
They'll push for a longer cure period — 18 to 24 months instead of 12. Twelve months is the standard tenant ask and a reasonable compromise. Eighteen months is the outer edge of what's fair. Beyond that, you're absorbing too much revenue loss before your remedy kicks in.
They'll try to define a replacement anchor broadly — any tenant above a certain square footage, regardless of use. Push back. A 45,000 square foot furniture store doesn't generate the same daily foot traffic as a 45,000 square foot grocery store, and your co-tenancy clause should reflect that distinction.
Some landlords will also insist that the co-tenancy remedy converts your rent to percentage rent rather than a fixed reduced rate. Percentage rent — a defined percentage of your gross sales — has its place, but it can result in lower protection than a fixed 50% reduction if your sales hold up better than expected through the anchor vacancy.
Co-tenancy clauses are most valuable for tenants whose business model is explicitly dependent on anchor-generated traffic: coffee shops, nail salons, dry cleaners, quick-service restaurants, and specialty retailers in grocery-anchored or power centers.
They're less critical for destination businesses — medical offices, law firms, service businesses that customers seek out directly — where the surrounding tenant mix has less impact on your volume.
If you're signing a retail lease in any center that has one or more anchor tenants and your location was chosen at least partly because of the traffic those anchors generate, a co-tenancy clause belongs in your lease. The absence of one doesn't show up in your first year. It shows up the month after the anchor closes.
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This article is for educational purposes only and does not constitute legal advice. LiabilityScore™ identifies potentially risky contract terms — it is not a substitute for review by a licensed attorney. Always consult qualified legal counsel for advice specific to your situation.