Co-tenancy or co-leasing clauses are common provisions in residential and commercial properties. They are both legally binding agreements, hence, it’s important to understand what they mean before adding them to your lease contract.
In this article, we’ll cover the different types of co-tenancy clauses for both residences and retail spaces.
CO-TENANCY IN RESIDENTIAL PROPERTIES
What is Co-Tenancy in Residential Properties?
A co-tenancy or a joint tenancy refers to a lease agreement wherein two or more individuals rent a property together. Under a co-tenancy agreement, both tenants sign a single lease or separate leases with the landlord.
Are Co-Tenants and Roommates the Same?
The terms “co-tenant” and “roommate” are often interchanged, but there are distinct differences between the two.
Co-tenants are two or more tenants that are renting a property together. Each tenant has signed the rental agreement with the landlord — that is, their names are listed under the contract.
On the other hand, a sub-tenant is an individual that pays part or all of the rent through a process called subletting. In subletting, there are two possible scenarios:
- The sub-tenant “takes over” the original tenant’s rent. In this scenario, the sub-tenant occupies the rental property without the presence of the original tenant. This usually happens when the original tenant no longer needs to reside at the rental property but the lease agreement has not expired.
- The original tenant gets a sub-tenant to help pay for rent. Sometimes, original tenants may look for sub-tenants or roommates who can offset a portion of the rent.
It’s important to note that the sub-tenant has no relationship with the landlord whatsoever. This means that the original tenant is still the one that is responsible for rent, upkeep, and so on.
Since subletting isn’t required nor is it prohibited, the decision to allow subletting in your Florida rental property is ultimately up to you. If you’re not sure if subletting is ideal for your rental home, you may want to consult a professional property manager.
How Does Co-Tenancy Work?
Co-tenancy is generally the same as regular tenancy. The main difference is that you’re renting out the property to more than one person. Here’s what usually happens under a co-tenancy:
- Each tenant signs the lease agreement with the landlord. They may sign a separate or a joint agreement.
- The co-tenants agree among themselves how they are going to split the rent and the utility bills. This decision is entirely up to the co-tenants and the landlord should not interfere at this point.
What Happens if a Co-Tenant Doesn’t Pay Their Share?
When one of the tenants fails to pay their rent, the burden is on the rest of the co-tenants. This is because everyone is responsible for paying the full rent amount every month. Co-tenants cannot use the non-payment of one tenant as an excuse. Hence, if the rent is not paid in full, the landlord can demand the missing amount from the other co-tenants.
However, if the co-tenants signed separate leases, they will only be responsible for their share. If one tenant violates the terms of the lease, he/she can be evicted without directly affecting the rest of the co-tenants. The downside is that you may have trouble replacing the evicted tenant since it’s unlikely that co-tenants are willing to have a stranger live with them. This is why most landlords prefer keeping their co-tenants under a single lease agreement.
CO-TENANCY IN COMMERCIAL PROPERTIES
Co-tenancy in commercial properties is very different from co-tenancy in residential rentals. If you’re looking into investing in a commercial property, it’s important to understand how the co-tenancy clause may affect your business’s future.
What is Co-Tenancy in Commercial Properties?
Co-tenancy clauses apply to commercial leases, particularly to retail spaces like malls, shopping centers, and so on. This type of clause protects tenants in the event that there is reduced traffic caused by the closure or non-operation of “key anchor” stores. “Key anchors”, sometimes referred to as “anchor tenants” or “anchor stores”, are large tenants that are designed to attract a broad audience. Popular department stores such as Macy’s, Sears, and JCPenney are common examples of anchor stores.
What is the Purpose of a Co-Tenancy Clause?
As mentioned earlier, a co-tenancy clause protects smaller retailers in the event that key tenants terminate their lease or are closed. When this happens, tenants have the option to invoke the clause in order to reduce their rent, terminate their rental agreement, and more.
What are the Types of Co-Tenancy Clauses?
There are three types of co-tenancy clauses. It’s important to be familiar with them so that you, with the help of your property management company, can negotiate the proper lease agreement.
Opening co-tenancy clause
This co-tenancy clause ensures that retail tenants do not have to open their doors (literally) until a number of tenants have opened for business. It allows tenants to revoke their commitment to the lease if other stores have not opened for business by a pre-established date.
Ongoing co-tenancy clause
The ongoing co-tenancy clause is the most common type of clause. Under this clause, the tenant’s obligations are reduced in the event that anchor tenants move out of their leased space, or when the commercial property’s occupancy falls below a certain rate. When this happens, the landlord is given around 90 to 180 days to find replacement tenants that are comparable to the ones that are no longer open.
If the landlord fails to secure new tenants, the ongoing co-tenancy clause allows the tenant to pay a reduced rent.
Pre-leasing co-tenancy clause
Under a pre-leasing co-tenancy clause, retail tenants have the option to terminate their leases in the event that only a handful of businesses have signed lease agreements by a pre-established date. Essentially, it protects tenants from having to open their doors when there is very little foot traffic.
THE BOTTOM LINE
Whether your investment property is residential or commercial, co-tenancy clauses are a complicated subject. They can be beneficial but they can also cause great harm to one’s real estate investment. That is why it is important to consult a property management company that can help you draft and negotiate a fool-proof lease agreement.
The in-house attorneys at Luxury Property Care have years’ worth of experience in the real estate industry. Through our expertise, we can guide you toward making informed decisions about your investment property.