The pandemic exacerbated many of the co-tenancy issues that have plagued retail landlords and tenants for decades, lawyers said at the recent ICSC+U.S. Law Conference.

This boilerplate lease language detailing tenants’ say in what others can do with a property became a thorn in the side of retailers and property owners alike as they attempted to adjust during the pandemic, according to Macerich vice president and senior real estate counsel Kathy Sherwood. “COVID accelerated a lot of things we were already seeing in co-tenancy. Anchors were already closing, and more department stores closed during the pandemic. The issue of internet sales was already a hot topic. That majorly magnified during the pandemic.”

Small shop occupancy rates, too, became a big co-tenancy factor after being almost a non-issue for years, she said. “The effect on small shop retail occupancy rates was something we hadn’t reckoned with. We never really worried that much about small shop retail occupancy rates in our contracts. We thought we were being fair. We weren’t agreeing to 95% or anything crazy, so we never had to wrestle with that. But with all these retailers going bankrupt en masse, we were all of a sudden faced with the default issue. We also had to grapple with how to measure sales when the tenants had been closed.”

Retailer and landlords alike need to rethink co-tenancy provisions so they don’t have an outsize impact on a properties’ overall health, said Kitchens Kelley Gaynes partner Roy Ruda, who helps landlords negotiate leases with tenants. “We’re stuck with co-tenancy provisions from a prior generation. If we go below a certain [gross leasable area], we take a giant hit to the rent. When retailers aren’t being flexible, the co-tenancy provision drives every leasing decision. They’re literally filling space to not hit a co-tenancy violation.”

A short-term solution upon which landlords and tenants agreed is a co-tenancy moratorium, or a period when certain clauses in the lease contract were suspended to accommodate pandemic measures. But Gap Inc. vice president and deputy general counsel in real estate law Matthew Irwin warned retailers not to cede too much control to landlords, even during a co-tenancy moratorium. He was particularly wary of the addition at properties of nontraditional uses like medical offices and automotive showrooms. “Do new and more concentrated nontraditional uses actually create that synergy the tenant was expecting? If they don’t, a tenant should know what the remedy will be.”

Irwin advised landlords to seek tenant approval before redeveloping or remerchandising. “Seek consent before you go out to do a redevelopment, especially. Their business model may not thrive in a center with such a concentration of nontraditional uses. They want the landlord to come to them for consent instead of giving away carte blanche in the lease.”

Change is happening slowly, Sherwood said. “Some of these old leases have stuff that makes no sense, but tenants are receptive to removing outdated provisions. There’s not a big slate of traditional anchors anymore, so very few tenants tried to push back when we asked them to remove lease language specifying certain chains.”

And though Gap Inc. still maintains a list of suitable co-tenants and uses, it recognizes the need for flexibility, Irwin said. “When it comes to substitution and subdividing anchor spaces, tenants are more amenable to replacement tenants not being in the same space as vacating tenants,” he said. Traditional retail tenants like Banana Republic, Gap and Old Navy are also amenable to alternative uses that still target similar consumers, he added, a switch from focusing on the product or type of use.

Registered attendees of ICSC+U.S. Law can watch session recordings here.