The California Supreme Court has upheld the validity of cotenancy clauses in retail leases, provisions that allow tenants to pay lower “substitute” rental rates after an anchor tenant at a retail center stops operating there.
The ruling sets a precedent that could reverberate nationwide as an epidemic of store closings by retail chains is projected to shutter up to 15,000 outlets in the U.S. this year.
Cotenancy clauses typically stipulate that a retail tenant is not obligated to pay full base rent when specified anchor tenants are not open and operating or when a minimum gross leasable area in a shopping center is not occupied. These clauses usually give the tenant the option of paying a lower rent, called a “substitute” rent, or terminating the lease.
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