Cotenancy and the importance of ‘Acceptable Replacement’ language

Lately, we have spent a fair amount of time focused on cotenancy provisions – specifically monetizing the impact of these clauses (think 「How much minimum rent will we lose in the first 12 months if Sears closes?」 What percentage of our tenants have the right to close if Sears closes.」). With the number of department stores announcing closures, analysts are quick to ask these questions.

Cotenancy provisions typically read 「If at any time during the term there are less than some number of department stores (Majors, anchors, etc) or less than some percentage of the gross leasable area (other than department stores) for more than X number of months, the tenant has the right to pay x% in lieu of minimum rent (or all rent). If the condition continues for x months, the tenant has the right to terminate.」 There are countless variations of these clauses – adding other requirements like 「and the tenant’s sales have dropped by more than x% over the same period,」 or 「the tenant has the right to terminate. If the tenant does not terminate, full rents resume.」

But, one of the most costly mistakes a landlord can make is not including a term – 「Acceptable Replacement.」 A department store or major may be defined in the lease as greater than a certain square footage, or it can sometimes be tenant name specific. In that case, the cotenancy provision will often read something to the effect of 「If Sears or its Acceptable Replacement,is not operating for more than 12 months, then tenant has the right to …」 If the lease reads only 「If Sears is not operating for more than 12 months,」 then we could have a Cotenancy provision that can never be cured.

Think about that – you have a mall. Sears closes. And, you replace the vacancy with a Nordstrom or a Macy’s or a Bloomingdales. Because it was name specific and because you do not have acceptable replacement language, a cotenancy failure will always exist.

So, make sure you include acceptable replacement language!

Feel free to comment if you have any thoughts or questions about cotenancy.

Who needs a blog about lease administration and lease language?

For the past 21 years, I have had the unique pleasure and responsibility of teaching a variety of courses for the International Council of Shopping Centers (ICSC). Most of the classes have been related to lease language, common area maintenance or accounting for non-accounting professionals. And, I probably get as much or more out of the classes as the students do, because the classes are always a conversation. I get to learn.

This past Monday, I spent the day leading two classes at ICSC’s University of Shopping Centers with a long-term friend and industry professional, Ken Lamy. The morning class was Finance and Accounting for Non-Accounting Shopping Center Professionals, and the afternoon class was a Case Study – where the students get to learn and apply that knowledge. So, you have brokers, marketing people, development professionals, some asset managers and even a few accountants just trying to learn the real estate terms. They come from both the landlord side and the tenant side, and are all trying their hands at a little bit of accounting and lease administration as groups of them develop an offer and a plan of action for a shopping center they 「want」 to acquire. 「Want,」 because not everyone would buy this center, but for purposes of the exercise, they do. And, in a little more than three hours, they realize they actually have learned some accounting and lease language!

But, what I try to get across in the classes is that every clause in a lease somehow affects cash flow, and cash flow affects value. So, what I will try to do with this blog is tackle parts of the lease and explain the impact on cash flow. Whether it is understanding the difference between true partial lease years, extended lease years and extended partial lease years, or why a 600 square foot hiking store can cost you a prospective tenant or millions of dollars, we will hit it.

We will address the cash flow and value of lease language! I intend to post weekly each Sunday.

(And a special thanks to Michael Beckerman from for sharing about the need for content as traditional media withers. Great session!)

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