The rise of e-commerce has fundamentally reshaped retail co-tenancy. What was once a theoretical provision protecting small retailers from landlord negligence became a weapon wielded by thousands of tenants as Sears, Kmart, JCPenney, Lord & Taylor, Pier 1, and dozens of other anchors shuttered hundreds of locations between 2015 and 2024. Co-tenancy clauses, often buried in lease addenda and ignored for decades, became the subject of multi-million dollar litigation and landmark lease renegotiations.
This guide explains how co-tenancy clauses work, how tenants leveraged them during the retail apocalypse, how the math of cure periods and rent reductions works, and how to maximize your co-tenancy protections going forward.
1. What Is a Co-Tenancy Clause?
A co-tenancy clause (also called a "co-tenancy condition" or "occupancy condition") conditions a tenant's rent obligations on the continued presence, operation, and/or occupancy of specified anchor tenants, a minimum overall center occupancy level, or both.
The Two Core Types
Opening co-tenancy: Conditions the tenant's obligation to open for business on specified anchors being open and operating at the start of the lease. If the anchor isn't open when the tenant's lease term begins, the tenant may delay opening, pay reduced rent, or terminate entirely.
Ongoing (operational) co-tenancy: Conditions rent obligations throughout the lease term on specified anchors remaining open and operating. This is the type triggered when an anchor goes dark after the lease has been running for years.
What Triggers a Co-Tenancy Event
| Trigger Type | Definition | Common in |
|---|---|---|
| Named anchor departure | Specific tenant (e.g., "Macy's") ceases operations or closes its space | Regional malls, power centers |
| Anchor going dark | Anchor vacates but may still hold the lease (no operations) | Enclosed malls |
| Occupancy percentage | Overall center occupancy falls below threshold (e.g., 75%) | Strip centers, lifestyle centers |
| Category anchor departure | Any tenant in a specified category (e.g., any grocery store) departs | Grocery-anchored centers |
| Square footage minimum | The anchor space falls below a minimum occupied SF | Department store-anchored malls |
Many co-tenancy clauses require the anchor to be "open and operating" — not merely holding a lease. This is critical: a dark Sears that is still paying rent but has emptied the store may still trigger your co-tenancy clause if it requires continuous operation, not just tenancy. Always negotiate for "open and continuously operating" language.
2. When Anchors Go Dark: The Retail Crisis
Between 2015 and 2024, the retail industry experienced an unprecedented wave of anchor store bankruptcies and closures driven by e-commerce competition, changing consumer habits, over-leveraged balance sheets, and pandemic-accelerated store rationalization:
| Retailer | Key Bankruptcy/Closure Year | Approx. Locations Closed | Co-Tenancy Impact |
|---|---|---|---|
| Sears | 2018 (Ch. 11); ongoing closures 2019–2024 | 700+ | Extremely high — anchor in nearly every major mall |
| Kmart | 2002, 2018 (same entity) | 600+ | Significant in off-mall power centers |
| JCPenney | 2020 (Ch. 11) | 250+ | High — 600+ mall locations at peak |
| Lord & Taylor | 2020 (liquidation) | 38 (all) | Moderate — upscale mall anchor |
| Neiman Marcus | 2020 (Ch. 11, emerged) | 22 (some) | Moderate — luxury mall anchor |
| Pier 1 Imports | 2020 (liquidation) | 900+ (all) | Lower (not anchor-scale but triggered occupancy thresholds) |
| Bed Bath & Beyond | 2023 (liquidation) | 470+ | High in strip centers — common anchor equivalent |
| Tuesday Morning | 2023 (liquidation) | 500+ | Moderate in strip/community centers |
The scale of these closures put co-tenancy clauses in the spotlight. Shopping mall landlords — Macerich, Simon Property Group, Brookfield, CBL & Associates — faced simultaneous co-tenancy trigger events across hundreds of properties, creating enormous pressure to either replace anchors rapidly or renegotiate tenant leases.
3. Case Study: Sears & Kmart Bankruptcies
Sears/Transform Holdco Bankruptcies (2018–2024)
At the height of its retail presence, Sears Holdings operated approximately 700 Sears and Kmart locations, most of them in enclosed regional malls. Sears' October 2018 Chapter 11 filing and subsequent store liquidations triggered co-tenancy clauses at hundreds of shopping centers simultaneously.
The Co-Tenancy Cascade: When a single Sears-anchored mall lost its Sears, often multiple in-line tenants simultaneously triggered co-tenancy rights. A 1.2 million SF mall with 200 in-line tenants might have 50 tenants with Sears-specific co-tenancy clauses, 80 with overall occupancy co-tenancy clauses, and 70 with "major tenant" co-tenancy clauses capturing any tenant over 50,000 SF.
Landlord Response: Landlords facing simultaneous co-tenancy events had to choose between: (1) rapidly recapturing Sears space and re-leasing it to qualifying replacements; (2) negotiating with in-line tenants for co-tenancy waivers in exchange for other lease concessions (TI allowances, rent reductions, lease extensions); or (3) accepting co-tenancy rent reductions pending cure.
Tenant Outcomes: Tenants with strong, well-drafted co-tenancy clauses achieved significant rent reductions — often 25–50% of base rent — for cure periods lasting 12–18 months. Those with termination rights used them as leverage to negotiate lease restructurings that included rent reductions, shorter terms, and additional options.
Base Rent: $45/SF/year = $90,000/year
Co-Tenancy Remedy: Drop to 50% of gross sales (percentage rent)
Sales at pre-Sears level: $800,000/year → 5% = $40,000/year
Sales after Sears departure: $580,000/year → 5% = $29,000/year
Rent reduction: $90,000 → $29,000 = $61,000/year savings
Cure period (18 months): $61,000 × 1.5 = $91,500 total savings
Tenant with no co-tenancy clause: 0 savings
4. Case Study: JCPenney's 2020 Bankruptcy
JCPenney Chapter 11 (May 2020) and Mall Co-Tenancy Ripple Effects
JCPenney filed for Chapter 11 on May 15, 2020, during the COVID-19 lockdowns — a double co-tenancy blow, as many malls were already closed. The company operated approximately 850 stores at the time of filing and ultimately emerged from bankruptcy under new ownership (Simon Property Group and Brookfield Asset Management) with approximately 650 locations retained.
The Dark Store Problem: During the bankruptcy, many JCPenney locations went dark — the stores were closed, but the bankruptcy stay prevented lease termination. This created a legal gray area: was a JCPenney under a bankruptcy stay that was physically closed "operating" for co-tenancy purposes? Courts split on this issue, with some holding that a bankruptcy stay preserved the lease but not the co-tenancy "operating" condition.
Replacement Tenant Disputes: After emergence, Simon/Brookfield's new JCPenney entity replaced the anchor at many locations. The question for in-line tenants was: does the same brand under new ownership satisfy the co-tenancy clause? Most clauses named "JCPenney" or "a department store of comparable quality" — so re-emergence largely cured the co-tenancy event.
Boutique Hotel and Fitness Conversions: At locations where JCPenney was truly gone, landlords proposed replacing the anchor with fitness clubs (Life Time, Planet Fitness), entertainment venues, or even hotel conversions. Whether these qualified as co-tenancy "cures" was hotly disputed — most co-tenancy clauses required a retail replacement, and a hotel or gym is not a retail department store.
5. Cure Period Math: Calculating Your Relief Window
The cure period is the most financially critical element of a co-tenancy clause. During the cure period, the landlord has time to replace the departed anchor. During this window, you are typically still paying full rent. Once the cure period expires without cure, your remedies kick in. Here's how the math works:
Anchor Departure Date: January 1, 2025
Lease Co-Tenancy Language: "Landlord shall have 18 months to replace the Anchor"
Cure Period Expiration: July 1, 2026
Full rent period (cure): Jan 1, 2025 → July 1, 2026 (18 months at $90,000/year)
Full rent cost: $90,000 × 1.5 = $135,000
After cure period (if uncured):
Rent reduction to 50% base rent OR percentage rent
Remaining lease term: 3.5 years
Annual savings post-cure: $45,000/year
Total savings: $45,000 × 3.5 = $157,500
PV of savings (8% discount): ≈ $131,000
Cure Period Variations
| Cure Period Length | Common Context | Tenant Negotiating Position |
|---|---|---|
| 6 months | Strip centers; smaller anchors | Strong — landlord must act quickly or remedies apply |
| 12 months | Typical for mid-tier anchors | Moderate — reasonable balance |
| 18 months | Regional mall major anchors | Weaker — long period of full rent with no remedy |
| 24 months | Landlord-favorable (resist this) | Weak — 2 years of full rent despite anchor absence |
| None stated | Ambiguous clause | Dispute risk — courts have interpreted variously |
The strongest co-tenancy clauses provide interim relief during the cure period — for example, 75% of base rent during the first 6 months of cure and 50% thereafter. If your clause only provides relief after cure period expiration, negotiate to add interim reduction provisions.
6. Remedies: From Rent Reduction to Termination
Co-tenancy clause remedies escalate in a spectrum from modest rent reduction to full lease termination. The available remedies depend entirely on what was negotiated in the lease.
Remedy Spectrum
| Remedy | Description | Tenant Strength |
|---|---|---|
| Partial rent reduction (e.g., 25%) | Fixed percentage reduction of base rent | Weak — fixed regardless of actual sales impact |
| Percentage rent election | Substitute percentage of gross sales for base rent | Moderate — automatically scales with revenue impact |
| Full base rent abatement | Base rent suspended entirely (NNN still due) | Strong — significant savings |
| All rent abatement | All rent (base + NNN) suspended | Very strong — rare to negotiate |
| Termination right | Tenant may terminate the lease with notice | Very strong — ultimate leverage |
The Percentage Rent Remedy in Detail
When percentage rent is the remedy, the calculation is:
PR = Gross Sales × Percentage Rate
Typical rates by retail category:
Restaurants / Food: 6–8% of gross sales
Apparel: 5–7% of gross sales
Jewelry: 5–6% of gross sales
Electronics: 3–5% of gross sales
Home furnishings: 4–6% of gross sales
Fitness / Services: 10–12% of gross sales
Example (apparel, 1,500 SF):
Base rent: $60/SF = $90,000/year
Post-anchor annual sales: $650,000
Percentage rent (6%): $650,000 × 0.06 = $39,000/year
Savings: $90,000 − $39,000 = $51,000/year
Termination Right: When and How to Use It
The termination right is the nuclear option — it allows you to exit an unprofitable location entirely. Key considerations:
- Notice period: Most termination rights require 60–180 days advance written notice after the co-tenancy failure and expiration of the cure period
- Window of opportunity: Many termination rights are only exercisable within a specific window (e.g., within 6 months of cure period expiration) — miss the window and the right lapses
- Use as leverage: A credible termination threat often motivates landlords to offer lease restructurings — rent reductions, shorter terms, or TI allowances — that are more attractive than the tenant actually leaving
- No restoration obligation: Negotiate to ensure that exercising a co-tenancy termination does not trigger restoration or holdover obligations
7. Replacement Tenant Standards
A critical but often overlooked component of co-tenancy clauses is what qualifies as a "cure." Landlords often try to cure co-tenancy failures with replacement tenants that technically fill the space but don't provide equivalent foot traffic benefits.
What Strong Replacement Standards Look Like
- Minimum size: Replacement must occupy at least 75–80% of the original anchor's square footage (prevents landlord from dividing the space among smaller tenants)
- Category equivalence: Replacement must be a "first-class retail tenant" or "department store of comparable quality" — not a fitness club, storage facility, or hotel
- National brand: Replacement must be a nationally or regionally recognized retail brand
- Continuous operation: Replacement must be "open and continuously operating" for retail sales — not just a lease execution
- Minimum lease term: Replacement must have a binding lease of at least 5–10 years (prevents a short-term pop-up from "curing" the co-tenancy)
- Credit standard: Some leases require the replacement to meet a minimum credit standard or have a national credit rating
Landlords routinely argue that filling a dark anchor space with a fitness club, co-working operator, or entertainment venue cures a retail co-tenancy clause. Courts and arbitrators have repeatedly found that such uses do not satisfy "comparable retail operation" or "department store equivalent" replacement standards. If your replacement standard is vague, landlords will exploit the ambiguity. Negotiate specific standards now.
8. Online Sales Impact on Co-Tenancy Provisions
E-commerce has reshaped co-tenancy clauses in ways the original drafters never anticipated. Here's how online sales intersect with co-tenancy today:
BOPIS and the "Operating" Definition
Buy online, pick up in store (BOPIS) has created definitional problems: if an anchor tenant has closed its full store but maintains a small pickup location in the same space, is it "operating"? Some courts have found that a pickup-only operation does not satisfy a "full-line retail operation" requirement, while others have found that any form of operation in the space satisfies the co-tenancy condition.
Online Sales Exclusions from Gross Sales
When percentage rent is the co-tenancy remedy, the definition of "gross sales" becomes critical. Landlords increasingly push for:
- Exclusion of BOPIS sales from the gross sales base (reducing your percentage rent and making the remedy less valuable)
- Exclusion of online returns processed in-store
- Exclusion of gift card sales (until redemption)
- Exclusion of sales tax, charge-backs, and employee discounts
The broader the exclusions, the less valuable percentage rent becomes as a co-tenancy remedy. Negotiate to include BOPIS sales and omnichannel-sourced sales in your gross sales definition.
Omnichannel Anchor Substitutes
Some landlords have argued that an anchor tenant with a robust online presence — even without a physical store — satisfies co-tenancy requirements because the brand drives customers to the center. Courts have universally rejected this argument: co-tenancy clauses require physical presence and operation, not brand recognition alone.
9. 12-Item Co-Tenancy Protection Checklist
- Identify all named and categorical anchor tenants covered by your co-tenancy clause
- Confirm the co-tenancy trigger definition requires anchors to be "open and continuously operating" — not just holding a lease
- Calculate the cure period length and mark the cure period expiration date on your calendar
- Identify all available remedies: rent reduction percentage, percentage rent option, termination right
- Verify whether interim relief (reduced rent during cure period) is available
- Document anchor operating status — conduct a physical inspection if an anchor appears to be winding down
- Review the replacement tenant standard — ensure it requires comparable size, category, and operation
- Confirm the definition of "gross sales" for percentage rent remedy purposes
- Note any termination notice deadlines and windows — mark them explicitly
- Evaluate whether the co-tenancy trigger also affects CAM/expense reconciliation obligations
- Assess whether any co-tenancy waivers or modifications were signed in prior lease amendments
- Consult a commercial real estate attorney before exercising any co-tenancy remedy — waiver rules apply