In a turbulent environment where each store location’s revenue is critical, physical retailers must take advantage of every avenue for rent reduction savings.
That means leveraging lease clauses like co-tenancy to the maximum. The problem is they’re cumbersome to enforce because co-tenancy violations must be manually “audited” - typically in the form of walking the strip mall, shopping mall or plaza - when you’re using a traditional lease management platform that relies on third-party data sources.
Now just multiply that complexity by thousands of locations, and you can see why retailers can struggle to realize these savings.
It doesn’t have to be that way.
For retailers, co-tenancy clauses are essential for mitigating risk. These clauses primarily protect smaller retailers—referred to as satellites—when an anchor tenant, like a large department store, vacates the property or if an unforeseen event, such as a global pandemic, affects the shopping habits of consumers.
These clauses ensure that satellite tenants receive some form of relief, typically in the form of reduced rent or the ability to terminate the lease early, when the overall occupancy of the venue falls below a pre-agreed threshold.
We gave you one example of how retailers benefit from these clauses.
Another would be the right to leave or pay less rent when common area maintenance (CAM) is insufficient, leaving significant damages that can affect operations. Similarly, a force majeure clause could allow a tenant to leave the property and their lease earlier than planned due to unforeseen circumstances.
Some co-tenancy clauses can determine what other types of businesses move in nearby. A spa with grooming services may not want a barbershop right next door. With a well-written, well-executed co-tenancy clause, retailers have significant input on what types of neighbors they co-exist with.
Of course, retailers rely on market data and analytics software to track other tenants in the building. This has the added benefit of providing leverage in negotiations. Many third-party data sources, however, are costly and may not be as updated as you need.
For retailers with extensive portfolios, managing co-tenancy clauses can be daunting. One significant challenge is the lack of consistency across different properties, which can lead to confusion and inefficient lease execution. Each lease may have unique terms and conditions, making it difficult to maintain a standardized approach.
Another issue lies in the fine print of these clauses. Some leases may include conditions that allow the termination of co-tenancy provisions if certain requirements are unmet. For instance, tenants must often be in good standing and may need to provide proof of sales to invoke the clause. These stipulations can complicate the process, adding another layer of complexity to lease management.
Modern lease administration software can be a game-changer for retailers managing extensive portfolios. These tools offer an ideal integration between lease portfolio management, first-party market data and advanced alerts that greatly reduce the manual lift typically required to realize the savings from co-tenancy violations.
Advanced lease administration software can also address these challenges by automating the extraction and analysis of specific clauses from multiple leases. This technology provides retailers with a centralized platform to manage their leases, ensuring consistency and accuracy in co-tenancy clause execution.
This automation not only enhances efficiency but also provides actionable insights that can lead to significant savings. Retailers can quickly determine which locations qualify for co-tenancy relief, potentially saving up to 20% on rent annually.
For a retailer with hundreds or thousands of locations, these savings can add up to hundreds of thousands of dollars quickly!
It all starts with equipping your team with modern, advanced lease administration tools that reduce manual audits as well as reliance on third-party sources. Choose wisely.