Why Co-Tenancy Retail Lease Restrictions Need to Evolve

Co-tenancy lease restrictions need to evolve alongside the retail market. The restriction has been common for decades as a way for retail tenants to ensure other tenants within the center aren’t a conflict or excessive competition. Today, however, consumers are using retail differently, and curating a unique tenant mix is integral to driving foot traffic and sales at a center. Often times, these lease provisions work in opposition to both landlord and tenant goals.

“There are a lot of use restrictions that were designed 20 to 30 years ago that were intended to create a co-tenancy that was brand relevant,” Richard Rizika of Beta Retail, a company that works with retail landlords to implement marking and technology solutions, tells GlobeSt.com. “If I was a soft goods merchant, I would want to keep certain uses out that I didn’t think were consistent. A typical scenario would be an area of congregation, like entertainment or a fitness facility, where people would be staying a long time and wouldn’t be expected to shop for soft goods. Those uses could erode the parking area that would otherwise be used for a soft goods retailer.”

Landlords have long pushed against co-tenancy restrictions, because it takes away control over the center and impact revenue. Now, these restrictions, however, are also impacting retailer revenue by limiting the entertainment and tenant options at a shopping center. “I believe that a lot of existing tenants have recognized they way consumers are utilizing a shopping center today is different than it was 20 years ago,” says Rizika. “A lot of behaviors have changed since the Great Recession, and it is continuing to evolve. Landlords are also realizing that these clauses are not beneficial to the tenants either. So, both tenants and landlords are starting to come up with creative solutions to restructure lease clauses.”

Moving forward, Rizika says landlords will need to evolve away from “formula-like” retail environments, which focus on anchor and national credit tenants. “Now, there is a greater appreciation with blending those credit anchors with a more regional strategy to create more points of differentiation,” he says. “The professional owner has to change from reliance on the retailer to generate traffic for the shopping center to more of a partner shift mentality with the merchants to increase traffic within the shopping center to make it a more vital place.”

While these lease agreements will certainly evolve, they won’t disappear or even become less restrictive. Instead, Rizika estimates that they will evolve as well to meet the new needs of retail landlords and consumers, as well as retailers. “There will be an evolution of use and co-tenancy provisions that will evolve to enable uses to be acceptable that are more relevant to the future shopping center environment,” he says.