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Landlord’s Failure to Meet Co-Tenancy Requirement Lets Tenant Out of Lease

A recent New York case illustrates the importance of having a carefully drafted co-tenancy clause in a commercial lease. In Staples the Office Superstore East, Inc. v. Flushing Town Center III, L.P., a shopping center Landlord had entered into a Lease with Staples, the large office supply store, for Staples to open a new store. The Lease included a co-tenancy provision that granted Staples certain rights and remedies, including the right to terminate the Lease, in the event certain co-tenancy requirements were not met. One of those requirements was that “Home Depot (or a national retailer having not less than 100 stores and occupying not less than 100,000 square feet)” be open for business in a specified area of the shopping center. The Landlord subsequently leased the specified area to BJ’s Wholesale Club instead of Home Depot. Staples claimed this was a violation of the co-tenancy provision, triggering the termination rights that Staples had negotiated into the Lease. After the parties exchanged several threatening letters over the dispute without resolution, Staples filed suit seeking a declaratory judgment that the co-tenancy requirement was not satisfied by the Landlord and that therefore Staples could terminate the Lease.

Staples argued that BJ’s was not a “national retailer” within the meaning of the co-tenancy provision, because it had stores in only 15 states and because it lacked the “strength and stability” of a retailer like Home Depot, which was important to Staples because it was entering into a 15-year lease with the Landlord. The Landlord countered, arguing that BJ’s had a national reputation and operated in the most populated regions of the United States, and that it operated nationally via e-commerce. The battle lines were drawn. Ultimately, the court, after noting that the parties failed to define “national retailer” in the Lease, looked to Black’s Law Dictionary for the definitions of “national” and “retailer.” The court determined that the term “national retailer” did not mean “nationally known,” as the Landlord had argued, and granted Staples summary judgment.

Co-tenancy requirements should provide a tenant with protection from the loss of key anchor tenants (and the resulting loss of customer traffic). At the same time, such requirements should provide the Landlord with reasonable flexibility to find replacement anchor tenants and adapt vacant space to changes in the retail industry. Careful drafting of a co-tenancy clause is the key, so the parties’ intentions can be clear, without the need to resort to litigation.

  • Principal

    He has practiced in the areas of real estate, business and banking law in Oregon for more than 30 years. Joe’s real estate practice includes representation of owners, developers, tenants and lenders in a wide variety of matters ...

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