The Evergreen Co-Tenancy

One of the main concerns of the fashion brand opening up a store or shop within a mall is whether the brand itself will be enhanced or diminished by association with the co-tenants in the mall. Too often people associate quality with based on a general perception of whether or not the mall is identified as a luxury or upscale mall.  However, in truth that is only a function of the nature of the tenants in the mall. The tenants bring the value and reputation in the mall markets the same.   The problem faced in deciding whether or not to enter into a lease with the mall is beyond the fit for the fashion brand today, but what will it be tomorrow especially if there is a communication and the quality of the tenancies.   These changes can arise for  a variety of reasons including but not limited to issues beyond the control of the mall owner such as the vicissitudes and changes in the marketplace affect the flow of traffic and demography being attracted to a particular mall.

This is further exacerbated when dealing with a new project. It is axiomatic that when negotiating for space in a mall that is under construction that the proposed tenant received assurances as to the tenants that will be open and operating their businesses upon the “Grand Opening Date.” There are variants on this and sometimes landlords will not guarantee that the aforesaid businesses will actually be open for business, merely that the lease will have been executed. That in itself raises questions as to the nature of the signed ease. If an anchor tenant has the ability to terminate the lease if certain metrics are not met that could vitiate any comfort the new proposed tenant may have in that particular anchor tenant.

But that is old hat. No matter how many times we negotiate those particular revisions it is an accepted norm. What about the fashion tenant that may be launching in the United States or may be in an expansion mode looking at different in various malls throughout the United States/ We have seen in recent history the vagaries of the economic marketplace and the havoc that can be wought when certain sectors of the economy are adversely affected. We’ve also seen the effect of e-commerce and web marketing on traditional brick and mortar. Witness the trend towards spectacle being combined with the traditional mall shopping experience.  All of these are having an negative trending effect on the stability of the complexion mall.

How does one protect the fashion brand in a 5 to 10 year lease from dimunition in the quality of the co tenancies? The most direct way is with an evergreen co-tenancy, meaning that assurances must be given as to a certain number of brands having leases in effect throughout the term of the new brand’s tenancy interest in the mall. As an example one might schedule a list of 20 brands that are deemed breakpoints in connection with continued tenancy. Of those 20 brands you might provide that no less than 10  must  at all times  be in operation in the mall. An alternative is to have a provision for comparable replacements  should any of the key tenancies be terminated. Having such a provision ensures that the new fashion client is not the last man standing in a failing proposition.

Needless to say based upon the value of the brand and its leverage negotiating such provision is not a given. But it is something that is a very valuable insurance commodity in this market and should be pursued aggressively . Moreover, a mall owner and operator should intellectually be comfortable giving an evergreen cotenancy because it is marketing its small at a particular tranche in the marketplace and but for such positioning the fashion client would not be entering into the lease. Simply put the landlord has the duty and obligation not really present a vanilla box to the proposed tenant but also to maintain the quality and status of the mall is represented by the tenancies.

Leonard N  Budow, 2 June 2016

Fox Rothschild LLP, Chairman Fashion Group