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Co-Tenancy or Operating Covenant Remedies: Penalty or Bargained-for Remedy?

In shopping center leases, landlords and tenants protect themselves with monetary remedies for when the tenant goes dark or fails to operate, or when the landlord cannot meet the co-tenancy requirements set forth in the lease. Recently, there has been a surge in landlords and tenants that are challenging the monetary remedies in the leases for co-tenancy or operating covenant failures as unenforceable penalties. Often, the challenged leases are antiquated and negotiated in a vacuum long before the parties make use of the remedies or the implication they might have on the shopping center. Typically, the challenged remedies, such as 50 percent rent abatement for a co-tenancy failure, are triggered regardless of whether the tenant suffered any economic loss at the shopping center. In fact, sometimes the tenant actually increases its sales and profit margin.

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