NAI Southern Real Estate’s George Mennen speaks at North Carolina Bar Association CLE Program

The passages within a retail tenant’s lease that allow for certain remedies should there be a material change within the properties Anchor tenants’ operations or occupancy:

• Prior to the systemic economic melt down in late 2008, co-tenancy clauses in retail leases were rarely examined in such minutia as currently appears to be necessary. In prior days, our focus as brokers in these clauses was centered on the anchors square footage utilization and competition. After those items were addressed, discussions would turn to rent abatement and reductions. Now in first quarter 2010, co-tenancy clauses’ focus and scrutiny may need to be expanded to include assessing probability of an anchor or co-anchor tenant going dark, and to what degree might the anchor tenants’ new business practices affect the other tenants or landlord. These items were once considered a non-issue, but in today’s retail leasing environment they may need considerably more thought and analysis.

Let us first examine the Anchor relationship:

• Retail centers need anchor tenants not only shoulder a vast portion of the financial burden, but also to drive traffic to and through the center. Common anchor tenants commit to the development first, and therefore have considerable influence as to the terms of their lease. Rarely will they allow any type of perceived market competitor to locate within an unmanageable distance to the anchor’s front door. The influence and preference is similar when there are co-anchors.
• When a landlord is faced with the disaster of prematurely loosing an anchor, e.g. Linens and Things, Circuit City, there will be impacts to the co-tenants. One of the difficulties is measuring those impacts. When you lose an anchor, you can assume that traffic will drop in the center and that sales and revenue would adjust accordingly.

Items to consider when drafting language in a lease to protect your tenant client, while at the same time leaving them an opportunity?

• There are significant variables, coupled with the fact that this is unchartered territory for many. Of course you want your clients to have options in the event of material change. The current economic environment has opened up many new items for tenants for tenant to negotiate, therefore creating options. So you have an opportunity to insulate your client from risks, while at the same time possibly allowing them to capitalize in gaining lease concessions or market share.

Consider the following:

• If the anchor tenant prematurely vacates, it is an opportunity for the others to gain market share. The other junior tenants may be retailing similar goods and services to the anchor, but not in a scale that the anchor felt to be a direct competitor. With the anchor now closed, the juniors have an opportunity. That opportunity does have other risks though, specifically the question of the landlords’ fiscal health.

Protecting your clients from the possible adverse effects of co-tenants new or modified business practices:

• This again deals with not water heavily chartered. However now it appears necessary to be further analyzed and the risks assessed for both the tenant and the landlord. The daily headlines continue to read about businesses fighting for viability. Some would opine that as retail businesses strive to reinvent themselves and pursue new sales, there could be and have been undesirable impacts to the other tenants.
• Just think of some of the new and innovative ways businesses are marketing themselves. Would any of those methods impact your practice? Would they impact your tenancy? In times past after wrapping up the building or monument signage debate and who could put out a sandwich board sign on the side walk, this topic was closed. Now though, we are seeing that it maybe necessary to further scrutinize scope of the clauses for the protection of all parties.
• From the landlord representation perspective, we are always attempting to balance the tenant restrictions with their ability to operate. We certainly don’t want to in any way inhibit one of the tenants, but at the same time, we can’t allow for the center or the other tenants to be negatively impacted. In either case, fluidity and flexibility and most times creativity are characteristics that now more than ever we are having to display during negotiations.
• Of course during any transaction cycle, there are going to be obstacles to overcome. Some are expected and some like co-tenancy clauses are less frequently analyzed to the degree that now appears to be warranted. They now afford you another opportunity to further serve your clients best interests.

George Mennen Jr is a Vice President with NAI Southern Real Estate, and the Broker In Charge of the firms Mooresville, NC operation.

Contact George at 704-375-1000 or by email