Retail Leasing in Texas: Percentage Rent, Exclusive Use, Co-Tenancy, and Anchor Tenant Dynamics

Retail leasing (for shopping centers, malls, lifestyle centers, and freestanding retail) adds complexity to standard commercial leasing through provisions that don’t appear in office or industrial leases: percentage rent (rent based on the tenant’s sales), exclusive use clauses (the tenant gets exclusive rights to a specific use category), co-tenancy clauses (the tenant’s rent or obligations depend on other tenants’ presence), kick-out clauses (early termination rights based on sales performance or co-tenancy), and substantial anchor tenant dynamics. For DFW retail landlords, the metro’s retail market is one of the largest in the country, with strong demand in Plano, Frisco, Southlake, and Uptown sub-markets producing aggressive lease terms, and softer demand in older suburban retail product producing different lease dynamics. Texas retail leases follow Chapter 93’s general framework but add layers of complexity that require specialized analysis. Here’s what landlords need to know about the unique features of retail leasing, the typical provisions that drive disputes, and the strategic considerations for landlords and tenants.

Percentage rent

In retail leases, the rent often has two components:

• Base rent (or “minimum rent”). A fixed monthly amount the tenant pays regardless of sales.
• Percentage rent. An additional amount calculated as a percentage of the tenant’s gross sales above a defined “breakpoint.”

The structure aligns the landlord’s and tenant’s interests, because both benefit when the tenant’s sales are strong.

Common percentage rent structures:

• Natural breakpoint. The breakpoint is calculated as the base rent divided by the percentage rate. If base rent is $50,000/year and the percentage is 5%, the natural breakpoint is $1,000,000 in sales. The tenant pays percentage rent on sales above $1M.
• Artificial breakpoint. The lease specifies the breakpoint independently of the percentage calculation. A higher artificial breakpoint reduces percentage rent; a lower one increases it.
• Tiered percentage. Different percentage rates at different sales levels. Higher rates may apply at higher sales levels.
• Excluded sales. Some sales (returns, exempt categories, sales to specified parties) may be excluded from the gross sales calculation.

Percentage rent disputes typically involve:

• Definition of “gross sales”: what’s included and what’s excluded.
• Audit rights: the landlord’s right to verify sales reports.
• Reporting timing and content: what the tenant must report and when.
• Penalty for under-reporting: the consequences if the tenant misreports.

Exclusive use clauses

An exclusive use clause grants the tenant exclusive rights to a specific use category at the property. Examples:

• A coffee shop might have an exclusive use clause prohibiting other coffee shops at the same property.
• A clothing retailer might have exclusive use for women’s apparel.
• A restaurant might have exclusive use for a specific cuisine or category.

Exclusive use clauses protect the tenant’s investment by ensuring the property doesn’t add competing tenants.

Common provisions:

• Scope of exclusivity. What specific products or services are covered.
• Exceptions. Specific exceptions for incidental sales, established existing tenants, anchor tenants, etc.
• Geographic scope. Whether exclusivity covers the entire property, a specific area, or specific units.
• Duration. Whether exclusivity is for the full lease term or limited.
• Remedies for violation. Damages, lease modification, or other remedies if the landlord violates by leasing to a competing tenant.

Co-tenancy clauses

A co-tenancy clause makes the tenant’s obligations contingent on the presence of other tenants in the property. Two main types:

• Opening co-tenancy. The tenant is not obligated to open for business until specified other tenants are open. Common for stores in shopping centers that depend on anchor tenant presence.
• Operating co-tenancy. The tenant has rights (typically rent reduction or early termination) if specified other tenants close or if overall occupancy drops below specified thresholds.

Common operating co-tenancy provisions:

• Anchor tenant departure triggers reduced rent for inline tenants.
• Specified percentage of inline space being vacant triggers tenant rights.
• Failure of named tenants to operate triggers tenant rights.
• Cure period. The landlord typically has a specified period to cure the co-tenancy failure (replace the departed anchor, lease the vacant space, etc.) before tenant rights vest.

Co-tenancy clauses are critical for retail tenants because the property’s traffic and overall vibrancy directly affect each tenant’s business. Without co-tenancy protection, a tenant in a struggling shopping center has limited recourse.

Kick-out clauses

A kick-out clause allows the tenant to terminate the lease early under specified circumstances:

• Sales performance. Tenant can terminate if sales fall below specified thresholds for specified periods.
• Co-tenancy failure. Tenant can terminate if co-tenancy thresholds aren’t met.
• Property changes. Tenant can terminate if specified changes occur (sale to certain types of buyers, conversion of property, etc.).
• Specific events. Tenant can terminate on specific events (death of key partner, loss of franchise, etc.).

Kick-out clauses are heavily negotiated. Landlords want them limited; tenants want broader rights.

Common terms:

• Termination fee. Some kick-outs require the tenant to pay a termination fee.
• Notice period. The tenant must give specified notice before termination.
• Specific procedures. Tenant must show specific evidence of the triggering condition.
• Limitation on use. Some kick-outs are limited to specific reasons.

Anchor tenant dynamics

Anchor tenants (large, traffic-driving tenants like department stores, supermarkets, theaters, fitness centers) drive the economics of most retail properties. Anchor leases are typically:

• Substantially negotiated. With detailed terms tailored to the anchor’s needs.
• Long-term. 15-25 year terms are common.
• Different from inline tenants. With more favorable terms on rent, CAM, exclusive use, and co-tenancy.
• Critical to other tenants. Inline tenants depend on the anchor for traffic and visibility.

Common anchor lease features:

• Long-term renewal options. Anchors typically have multiple renewal options with predictable rent escalations.
• Reduced CAM. Anchors typically pay reduced CAM (sometimes a fixed amount, sometimes a capped pro-rata share).
• Specific use protections. Anchors typically have specific use protections preventing competing tenants.
• Self-help rights. Anchors may have rights to take certain actions independently (signage, building modifications, etc.).

The interaction between anchor leases and inline leases creates complex property dynamics. A landlord with an anchor whose lease is up faces significant pressure to negotiate favorable terms or risk losing the anchor (which then triggers inline tenant co-tenancy clauses).

Retail-specific operational issues

• Hours of operation. Retail tenants typically have specified hours of operation, with consequences for not maintaining them.
• Continuous operation. Many retail leases require continuous operation. A tenant who closes (even temporarily) without authorization can face termination.
• Signage. Retail signage is heavily regulated by lease provisions and city ordinances.
• Common area events. Property-wide events (sales events, holiday promotions) may be governed by the lease.
• Property branding. The property’s branding and marketing affect all tenants and may require coordination.
• Trash and waste. Retail tenants generate significant trash and waste; allocation of disposal costs and procedures matters.

The clauses that produce most of our retail litigation

If I had to rank the retail-lease clauses that produce litigation by frequency, the list would look like this:

• Co-tenancy. Always at the top. The anchor leaves or goes dark, the inline tenants invoke co-tenancy, and the dispute is about whether the co-tenancy threshold was actually breached, whether the remedy (rent reduction, termination right) is properly invoked, and how long the relief lasts. We see at least one of these every year in DFW retail.
• Percentage rent and gross-sales definitions. Tenants reporting suspiciously low sales numbers, or refusing to provide audit documentation, or arguing about what’s included in gross sales. The dispute is mathematical at the surface but procedural at the core: the lease’s audit rights, recordkeeping requirements, and dispute-resolution procedures decide the outcome.
• Exclusive use violations. A new tenant on the property is doing something the existing tenant’s exclusive-use clause covers, the existing tenant claims violation, and the landlord scrambles to define the scope of the exclusive. Usually wins or loses on how narrowly the exclusive was drafted.
• Continuous operation. The tenant goes dark, the lease has a continuous-operation requirement, and the landlord moves to terminate. Defenses range from “we never closed, we just reduced hours” to force-majeure to ADA-related claims. The provision is enforceable in Texas but factually contested.
• Holdover. The tenant doesn’t leave at lease end. Whether the holdover multiplier is enforceable depends on the rate and the actual damages. Covered in detail on the Commercial Holdover page.
• CAM reconciliation disputes. Common at year-end. Covered in detail on the CAM/NNN page.

What’s notably absent from this list: hours of operation disputes (rare, usually settle), signage disputes (rare, usually administrative), and trash/waste allocation disputes (almost never produce real litigation despite the lease detail). The cases that produce litigation in retail are about the substantive economic clauses, not the operational ones.

COVID-related issues

Although the immediate COVID-19 crisis has passed, the retail leasing landscape continues to be affected:

• Force majeure clauses. Many leases now include specific pandemic-related provisions.
• Co-tenancy adjustments. The treatment of pandemic-related closures by anchor tenants has been negotiated in many co-tenancy provisions.
• Continuous operation excuses. Many leases now include excused-closure provisions for emergency situations.
• Retail format changes. Some retail leases now address tenant format changes (in-store to omnichannel, expanded e-commerce, etc.).

Where the leverage really sits

For retail tenants:

• Co-tenancy protection. Critical for inline tenants. Without co-tenancy clauses, the tenant has no recourse for property decline.
• Exclusive use. Protects against direct competition.
• Kick-out clauses. Provides exit if the property doesn’t perform.
• Audit rights. Verify CAM and percentage rent calculations.
• Specific operational protections. Hours, signage, branding, and other operational matters that affect business performance.

For landlords:

• Limit broad co-tenancy. Co-tenancy clauses can require landlords to deliver outcomes (specific anchor tenants, occupancy thresholds) that may be hard to control.
• Limit kick-out scope. Kick-outs reduce the lease’s value to the landlord.
• Reasonable exclusive use. Exclusive use prevents the landlord from leasing to competitors but should be limited to specific uses.
• Audit cost allocation. Most leases provide that audits cost the tenant unless overcharges exceed thresholds.
• Preserve property flexibility. Lease provisions should allow the landlord to make property changes, modifications, and additions.

Common retail leasing mistakes

• Vague co-tenancy clauses. Co-tenancy clauses with vague triggers create disputes. Specify the conditions clearly.
• Unenforceable kick-out clauses. Kick-out clauses that lack specific procedures or evidence requirements are difficult to enforce.
• Percentage rent ambiguity. The definition of “gross sales” and the calculation method must be precise.
• Missing exclusive use exceptions. Exclusive use clauses without exceptions for incidental sales, anchor tenants, and existing tenants create unworkable situations.
• Anchor tenant departure unprepared. Landlords sometimes fail to prepare for the inevitable anchor tenant departure. Have a backup plan.
• Operational provisions inconsistent with use. Lease provisions about hours, continuous operation, and signage should match the tenant’s actual operations.