A co-tenancy clause in a commercial retail lease links your rent obligation to the health of the shopping center around you. If a named anchor store closes or overall occupancy drops below an agreed percentage, the clause lets you switch to a reduced rent and, if the problem drags on, terminate the lease without the usual breach-of-contract exposure. These provisions exist because a retailer’s sales depend on the foot traffic that neighboring stores generate, and paying full rent in a half-empty center is not sustainable.
What the Clause Actually Requires
Every co-tenancy clause rests on two conditions the landlord has to maintain: specific anchor tenants have to stay open, and the center as a whole has to stay above a minimum occupancy level.
Anchors can be identified by name or by characteristics such as minimum square footage.1ICSC. The (Almost) Perfect Co-Tenancy Clause Naming anchors specifically gives you stronger protection than a generic size requirement, because a landlord can argue that a replacement tenant technically meets the square footage even if it draws a fraction of the traffic.
The occupancy threshold is a percentage of the center’s total leasable area, commonly 70% to 80%, though the number is negotiable. Some leases measure occupancy by square footage; others count open storefronts. The distinction matters. Two large anchor spaces can go empty and gut the center’s traffic while barely moving the needle in a count of stores.
Opening vs. Ongoing Requirements
Co-tenancy obligations split into two phases. Opening co-tenancy applies before you are required to open your doors or start paying rent, and it ensures the center has reached a baseline level of activity before you commit. If the center misses its opening targets by your scheduled commencement date, you typically get three options: delay your move-in until the conditions are met, receive free or deferred rent while you wait, or terminate the lease if the conditions remain unmet past a specified deadline.2ICSC. Remedies for Co-Tenancy Failure The right to delay possession matters because it prevents you from sinking money into buildout in a center that may never reach critical mass.
Ongoing co-tenancy takes over once you open and continues through the rest of the term. It is what protects you if the center deteriorates years after you moved in. If a major retailer closes five years into a ten-year lease, the ongoing provision governs what happens next.
What Triggers a Violation
The clause fires when a required anchor stops operating or when overall occupancy drops below the agreed percentage.1ICSC. The (Almost) Perfect Co-Tenancy Clause
The most common anchor trigger is “going dark.” A dark store is one where the retailer has stopped serving customers even though it may still hold the lease and continue paying rent. The storefront sits shuttered, no one walks through the doors, and your co-tenancy right is triggered because the clause turns on whether the anchor is operating, not whether it is paying. A full vacancy, where the anchor’s lease has terminated and the space is empty, works the same way. The practical difference is that a dark anchor might reopen, while a vacant space requires finding an entirely new tenant.
The occupancy-threshold trigger is less dramatic. It fires when enough smaller tenants leave that the center drops below the agreed percentage, even if every named anchor is still open. A center can bleed out slowly through inline vacancy as easily as it can lose a single anchor overnight.
Your Remedies When the Clause Is Triggered
A well-drafted clause gives you an escalating set of options: reduced rent first, termination later if the problem is not fixed.
Reduced Rent
The immediate remedy is a switch from your fixed base rent to a lower alternative amount. Calculation methods vary. Some leases set the alternative as a flat percentage of gross sales, often around 4%. Others reduce the existing base rent by a fixed percentage, with 50% a common figure in the ICSC’s sample provisions.1ICSC. The (Almost) Perfect Co-Tenancy Clause If your lease also includes a percentage rent provision on top of base rent, check how the co-tenancy remedy interacts with it. The ICSC’s sample language replaces both minimum rent and percentage rent with the reduced alternative amount during a violation period, but not every lease follows that approach.
Rent reduction is not automatic. You have to send the landlord written notice identifying the violation and the date it began, delivered by whatever method the lease specifies.
Termination
If the violation persists beyond a defined period, typically 12 to 18 months, the lease usually gives you the right to terminate. This requires a separate termination notice giving the landlord a final window, commonly 30 to 90 days, to cure the problem before the lease ends. If the landlord cannot fill the vacancy in that window, you can walk away without the breach-of-contract liability that would normally attach to breaking a commercial lease early. Some leases also address reimbursement of unamortized buildout costs and moving expenses when termination results from a co-tenancy failure, though this is more common in leases where the tenant has significant negotiating leverage.2ICSC. Remedies for Co-Tenancy Failure
The Landlord’s Cure Window
No landlord agrees to a co-tenancy clause without a chance to fix the problem. The cure period is the landlord’s grace window to restore compliance before your remedies take permanent effect. Industry practice puts this window somewhere between 60 and 180 days, longer in leases that favor the landlord.
During the cure period, the landlord has to find a replacement that meets agreed standards. The ICSC’s sample clause requires a replacement to occupy at least 90% of the space the departing anchor used and to be a national retailer with at least 15 locations operating under the same trade name.1ICSC. The (Almost) Perfect Co-Tenancy Clause If a proposed replacement does not meet those objective criteria, the landlord may need your written approval, judged against factors like the replacement’s number of locations, whether it serves a similar function, and the quality of its merchandise relative to the departed store.
Once the replacement opens, your reduced-rent period ends and the lease reverts to its original terms. The landlord has to deliver written notice confirming the date the replacement opened.
How to Keep From Losing the Right
Having a co-tenancy clause and successfully invoking one are different things. The right is surprisingly easy to lose if you are not careful about timing and documentation.
Your remedy does not activate automatically. You have to formally notify the landlord that a violation has occurred and that you intend to exercise your rights. The notice should identify the specific provision violated, the date the violation began, and the remedy you are invoking. Deliver it by whatever method the lease requires. If the lease specifies a window within which notice must be sent, treat that deadline as absolute.
Continuing to pay full rent after a known violation without sending notice is the fastest way to lose the right. Courts can interpret prolonged silence as acceptance of the changed conditions. Some leases also contain waiver provisions that strip co-tenancy rights from assignees or subtenants. The ICSC’s sample clause limits co-tenancy remedies to the original named tenant and excludes assignees and subtenants unless the lease says otherwise.1ICSC. The (Almost) Perfect Co-Tenancy Clause Check this before you take over someone else’s lease.
Many co-tenancy provisions also require that you be operating your own store in compliance with the lease before you can claim any remedy.2ICSC. Remedies for Co-Tenancy Failure If your own doors are closed, you cannot turn around and demand reduced rent based on the resulting occupancy drop.
Situations That Can Complicate the Clause
Shadow Anchors
Many shopping centers include a “shadow anchor,” a major retailer that sits on the property but owns its own building and land rather than leasing from the landlord. Shadow anchors drive significant foot traffic, but the landlord has no control over whether they stay or leave. If your clause names a shadow anchor as a required tenant, the landlord faces a problem it cannot fix, because it cannot re-lease a building it does not own. Compromises often involve longer cure periods or alternative remedies when the departing anchor is a shadow tenant.
Anchor Bankruptcy
When an anchor files for bankruptcy, it can reject its lease under the Bankruptcy Code, which terminates the lease and leaves the space empty. The rejection typically triggers co-tenancy clauses for every other tenant in the center that depends on that anchor. Landlords facing this scenario sometimes negotiate directly with inline tenants, offering voluntary rent reductions in exchange for the tenants waiving or modifying their co-tenancy rights going forward.
Government-Mandated Closures
The COVID-19 pandemic exposed a gap in older co-tenancy provisions. Government shutdown orders forced anchors to close, which technically triggered co-tenancy failures across entire portfolios. But the closures were not the landlord’s fault and could not be cured by finding a replacement tenant. The ICSC now recommends that clauses explicitly carve out closures caused by government restrictions and require the tenant claiming the remedy to be operating its own store at the time.2ICSC. Remedies for Co-Tenancy Failure Leases signed after 2020 that do not address pandemic-related closures and force majeure in their co-tenancy language carry a significant drafting gap.
Are Co-Tenancy Clauses Enforceable
Landlords have occasionally argued that co-tenancy clauses are unenforceable penalties. The most significant answer came from the California Supreme Court in 2024. In JJD-HOV Elk Grove, LLC v. Jo-Ann Stores, LLC, the court held that co-tenancy provisions are enforceable as mechanisms of alternative performance, not as liquidated damages penalties. The reasoning is that the landlord has a choice between providing a fully occupied center and receiving full rent, or providing a partially occupied center and receiving reduced rent. Two levels of service at two price points, not a penalty for breach.
The court drew one important boundary. If the landlord lacks meaningful control over the anchor tenants at the time the lease is signed, the “choice” between performance levels may be illusory, which can push the clause toward penalty territory. That is the shadow-anchor problem again: a landlord who does not own the anchor’s building arguably never had a realistic choice. If your clause depends on a tenant the landlord cannot control, the enforceability question becomes less clear, and the lease language needs to account for that risk.