Philadelphia Real Estate Attorney Fredrick Masters' Article on Rent Reduction Co-Tenancy Clauses Published in Mann Report

An article written by Fredrick H. Masters — a shareholder in the Real Estate practice at Buchanan Ingersoll & Rooney's Philadelphia office — was published in the January 2010 edition of the Mann Report.

As explained in the article, titled "Rent Reduction Co-Tenancy Clauses in Retail Leases and Strategies For Lenders in Today's Economy," "As part of the frenzied retail development over the past 10 years, landlords and mortgage lenders accepted as 'market' rent reduction co-tenancy clauses by anchor tenants as well as smaller tenants who had negotiating leverage."

Masters went on to explain that "Rent reduction co-tenancy provisions entitle a tenant to pay reduced rent in the event one or more specified tenants are no longer in occupancy and open for business, or in the event a specified percentage of leasable square footage is no longer occupied by tenants who are open for business. These clauses often provide that the reduced rent will become effective if the condition is triggered and continues unabated for a specified continuous period of time. Often the tenant will have a right to terminate the lease if the condition is not abated within a specified period."

The article continued, detailing how "A mortgage lender whose loan is secured by retail property (especially a non or limited recourse loan) must take note of the co-tenancy rent reduction risk since it impacts the collateral's cash flow and value." Masters explained the steps to take when addressing this risk, including identifying all leases that contain co-tenancy clauses and becoming familiar with the specifics of those provisions.

"Having performed the required analysis, the lender is now in a position to formulate a specific plan to address any impending or potential co-tenancy rent reductions with its borrower," Masters concluded with. "Hopefully, the center is not already in financial distress and the lender and its borrower can address the risk pro-actively. However, where the center is already suffering distress, the lender may be forced to address the issue with the borrower by agreeing to lower rents or a mix of base rent and a percentage rent to maintain occupancies (with or without rent accruals), free rent periods for new tenants to maintain occupancy, short-term or seasonal tenancies to maintain occupancy or possibly an adjustment to the economic terms of the loan to reflect the consequences of an existing co-tenancy rent reduction."