Buying a Retail Plaza: The Co-Tenancy Clause That Can Crater Your Rent Roll When the Anchor Leaves
You underwrote the plaza off a rent roll where everyone pays full freight. Buried in the leases is a set of clauses that lets some of those tenants cut rent in half — or walk — the day the anchor goes dark. Here is how to find them before closing, not after.
What is a co-tenancy clause, and why does it matter to a plaza buyer rather than a tenant?
A co-tenancy clause is a lease provision that makes a tenant’s obligation to open, or to keep paying full rent, conditional on other tenants being open and operating — usually named key stores, or a minimum occupancy level across the centre. If the condition fails, the tenant may be entitled to abated rent, the right to go dark, or the right to terminate. Per an ICSC-published paper by Cory Sherman and John Shrives of Sherman Brown, the two broad categories are opening co-tenancy (conditions before the tenant opens) and operating co-tenancy (conditions throughout the term). It matters to a buyer because it converts a risk you cannot control — the anchor’s business decisions — into a direct hit to your income.
Source: ICSC, “The (Almost) Perfect Co-Tenancy Clause” — Cory Sherman & John Shrives, Sherman Brown
I’m Arthur Zhao. Here is the underwriting problem nobody puts on the marketing package. A plaza is priced off NOI, and NOI is built off the rent roll. But the rent roll is a photograph of today — it tells you what tenants are paying, not what they are obliged to pay if conditions change. Co-tenancy clauses live in that gap. They are the reason a plaza can pencil one way on Tuesday and a very different way on Wednesday, when a grocery anchor announces it is closing. This piece is about finding those clauses during your conditional period, pricing them, and knowing the one thing most buyers get backwards: a triggered clause is not the same as an enforceable windfall for the tenant.
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The rent roll is a photograph; the leases are the contract
A co-tenancy clause exists because of a simple commercial reality: small CRU tenants signed up for the traffic the anchor generates, not for the parking lot. So they bargain for a condition — I pay full rent as long as the draw is still there. Per the ICSC-published paper by Sherman and Shrives, the logic is explicit: co-tenancy provisions rest on the idea that a centre’s ability to attract customers is tied either to specific large retailers or to a proportion of the centre being open for business.
For you, the consequence is structural: your anchor and your CRU income are contractually welded together. The anchor is usually your lowest rent per square foot. The CRUs are usually your profit. The clause makes the cheap tenant load-bearing for the expensive ones.
Opening vs operating: only one of them is your problem
• Opening co-tenancy sets occupancy conditions that must be satisfied before the tenant opens for business. The remedy is typically the right to delay opening or to open at reduced rent. This is a development and re-tenanting issue.
• Operating co-tenancy (also called ongoing co-tenancy) sets conditions that must hold throughout the term. The tenant is already open; the anchor leaves; the clause wakes up.
If you are buying an existing, occupied plaza, operating co-tenancy is the one that can hurt you. Per WeirFoulds LLP (2020), thresholds in the Canadian market are commonly framed around a proportion of the centre remaining open, with figures like 75% or 80% of square footage used as illustrations. Treat those as examples of the order of magnitude, not a market standard. There is no standard. There is only the lease in front of you.
How the trigger is actually drafted
• a specific named tenant or key store must be open and operating;
• tenants occupying anchor premises, or premises exceeding a stated rentable area, must be open and operating;
• an occupancy threshold based on either a number of tenants or a percentage of the centre’s rentable area;
• some combination of the above.
Why you care: a named-store trigger is countable — four names, one closes, you know exactly where you stand. A percentage trigger is calculable, which means it is arguable, because the denominator (GLA) and the definition of “open” are both drafting choices. In diligence, a named trigger is easier to price; a percentage trigger is easier to fight about.
The remedy menu — what it costs you
• Abated rent — either a rate pre-set in the lease that applies once co-tenancy fails, or the current rent reduced by a stated percentage;
• Percentage rent — the tenant pays a share of gross revenue during the failure instead of base rent;
• The right to go dark for the duration of the failure;
• The right to terminate if the failure runs past a specified length of time.
The sample provision appended to that paper gives you a concrete sense of scale (a drafting precedent, not a market benchmark): the operating requirement is two key stores plus CRU stores comprising 25% or more of the project’s GLA; if it is unmet for 120 consecutive days, the tenant may either close for business, or — instead of Minimum Rent, Percentage Rent and Additional Rent — pay an amount equal to 50% of that total each month, while still paying all utilities.
⚠️The most-missed trigger: an anchor that stops operating without leaving. Most operating requirements are drafted around a tenant being “open and operating,” not merely holding a lease. A grocery chain that keeps paying rent through the end of its term but shutters the store still satisfies its own covenant to pay — while potentially breaking your co-tenancy requirement and arming every CRU downstream. When you read the trigger, confirm whether it says operating or merely leased. It is a one-word difference with a seven-figure tail.
💡 Model co-tenancy as a valuation problem, not a legal footnote. Income lost to abatement does not cost you the abatement — it costs you the abatement divided by your cap rate. An illustrative example: $80,000 of annual rent lost to triggered abatements, capitalized at 6%, is roughly $1.33M of value. (Illustrative arithmetic only — not a quote, a comp, or a market figure.) That is the number your conditional period is buying you the right to discover.
Old Navy: a triggered clause is not a cheque
In Old Navy (Canada) Inc. v. The Eglinton Town Centre Inc., Old Navy’s lease named four key stores — one of which was Danier Leather. All four had to be open, failing which Old Navy did not have to open or operate and needed only pay 50% of Minimum Rent for the first three months of the failure, and 25% thereafter (the “Alternative Rent”). Danier Leather filed for bankruptcy in February 2016, and Old Navy asserted the clause.
The Ontario Superior Court sided with the landlord. Despite the bankruptcy, the centre remained over 90% leased, there was no decrease in shopper traffic, and Old Navy suffered no losses — yet on Alternative Rent it was barely covering half its own share of CAM while the landlord received no minimum rent at all. The court found Old Navy’s interpretation commercially unreasonable. The appeal was dismissed (2020 ONCA 679).
Read that as a buyer, not a lawyer: the clause’s text, the actual commercial impact, and whether the landlord offered a substitute all feed into how a court reads it. That cuts both ways — it is a reason not to panic, and equally a reason not to bet that the clause in your leases would fail if tested. Litigation is not a diligence strategy.
ℹ️A detail from the Old Navy file worth carrying into every deal: the landlord’s termination right had been agreed in the letter of intent but, for reasons never explained, was left out of the executed lease. The landlord only got it back because the court granted rectification. Do not underwrite on the assumption that a court will repair a lease for you. The document you read in diligence is the document you own.
The landlord-side protections you want to find
• Replacement store rights. A landlord cannot guarantee any retailer stays for a decade, so a well-drafted clause lets the landlord cure by substituting a comparable store. The paper stresses objective criteria: its sample lets the landlord replace a key store without tenant consent where the replacement occupies at least 90% of the vacating key store’s former space and is a national retailer with at least 15 stores under the same trade name. It also notes size floors such as 25,000 square feet or more are commonly used as objective criteria. Note that in the Old Navy case the landlord did propose replacement retailers — and the tenant did not respond.
• A sunset clause. This caps how long a tenant can sit on abated rent. In the sample, if the operating requirement is still unmet during the 12-month period following the initial failure period, either party may terminate on not less than 6 months’ written notice, exercisable within 60 days after that 12-month period; if the landlord terminates, the tenant may within 15 days elect to stay and resume full rent, voiding the termination.
A lease with a named-store trigger, no replacement right and no sunset is the worst version of this instrument you can inherit.
What to actually do during the conditional period
Build a trigger matrix. One row per tenant; columns for named stores, threshold %, consecutive-day period, remedy, replacement right, sunset, and remaining term.
Stress-test the NOI. Assume the largest anchor goes dark next month. Run the matrix. Rebuild NOI on the downside, divide by your target cap rate, and compare to the asking price. The delta is what you are being asked to absorb.
Convert the finding into deal terms. Options: reprice; require vendor representations and warranties on anchor lease status; obtain estoppel certificates from the anchors and from any tenant holding co-tenancy rights, confirming term, rent, no default and no existing co-tenancy failure; or keep a clean due-diligence out. Have your commercial broker, a real estate lawyer and your accountant read the matrix together — this is not a solo review.
Frequently Asked Questions
Does every tenant in a plaza have a co-tenancy clause?
No — and usually only a small minority do. Per the ICSC-published paper by Cory Sherman and John Shrives (Sherman Brown), co-tenancy provisions require the landlord to assume significant risk, so a tenant needs real negotiating leverage to obtain one; in most cases that means large national tenants. Local independents rarely have them. The uncomfortable implication for a buyer: the tenants most likely to hold this right are also the ones contributing the most rent.
If the anchor closes, do those tenants automatically get to cut rent?
No. In Old Navy (Canada) Inc. v. The Eglinton Town Centre Inc., a named key store (Danier Leather) did go bankrupt in February 2016, but the court still found for the landlord: the centre remained over 90% leased, shopper traffic did not decline, and Old Navy suffered no sales loss, so its reading of the clause — paying 50% and then 25% of Minimum Rent, potentially indefinitely — was commercially unreasonable. The appeal was dismissed (2020 ONCA 679). The outcome turns on the drafting, the actual impact, and whether a substitute was offered.
How do I find these clauses if the seller only gives me a rent roll?
You don’t — which is exactly the point. Make delivery of complete executed leases and all amendments a documented requirement of your due-diligence condition, with enough days to actually read them after delivery. A seller who supplies only a rent roll and abstracts is not necessarily hiding anything, but you cannot underwrite co-tenancy risk from a summary. If the leases don’t arrive, that is a reason to extend the condition or walk — not a reason to assume.
Is a plaza with co-tenancy clauses a bad buy?
Not inherently. Their presence often signals you have creditworthy national tenants, which is an asset-quality positive. What you are pricing is the combination: how long the named anchors’ leases run and how strong their covenant is; whether the landlord holds a workable replacement store right with objective criteria; and whether a sunset clause caps the abatement period. With all three, the risk is bounded and priceable. With a named trigger and none of the protections, you have written your tenants a free option.
Can I renegotiate a co-tenancy clause after I take over the plaza?
Only if the tenant agrees — you take title subject to the existing leases, and a co-tenancy right is part of the bargain the tenant already paid for in its rent. Realistically the leverage point is renewal: when the tenant wants an extension, the clause is back on the table, and that is when a landlord can push for a replacement-store right or a sunset. Which is why the remaining term on each co-tenancy-holding lease belongs in your matrix — it tells you when you get to fix it.
Arthur Zhao
Real Estate Broker · FRI · ABR · SRS · PSA · MCNE · E-PRO · CLHMS & GUILD Elite · REAIS
VP & Branch Manager, Bay Street Group Inc.
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