Keeping Retail Tenants Open For Business
11/2/2016 | Articles & Alerts
In the current economy, it is critical to attempt to force the tenants of a retail shopping center to be open for business. If a number of tenants close, the other tenants may have rights to pay less rent or terminate their leases under “co-tenancy provisions”, and the closures will hinder the landlord’s ability to lease other vacant space in the shopping center. In addition, many lenders are skeptical in lending funds to shopping centers with vacancies even if the cash flow is sufficient to pay the requested debt. Such lenders take the position that the loan will not be as secure because a closed tenant is more likely to default in its obligations to pay rent.
In order to protect against such closures, landlords should negotiate for a “continuous operation” covenant in their leases. This covenant should include obligations for the tenant to open for business, continuously operate for the entire term (including all renewal terms), use their entire premises for the sale of their goods or services, fully stock their premises with inventory and employ a full staff of employees. This covenant should also include a requirement that the tenant operate its business in a manner that will maximize its sales from the premises.
Many tenants resist agreeing to a “continuous operation” covenant and take the position that, so long as they are paying all of their rental obligations under their lease, they should not be required to be open and should not be in default. When negotiating a lease with such a tenant, landlords should attempt to include a provision in the lease that obligates the tenant to open for business for at least one full day prior to an agreed upon deadline. Although this provision will not prevent the tenant closing for business during the lease term, a tenant is unlikely to invest money in opening a store for business and then close immediately thereafter. Usually, if the store is open for at least one day, the tenant will remain open for as long as possible and only close if the sales from the store do not justify the cost of employing the personnel necessary to keep the premises open for business.
Landlords could also insist on a compromise with the tenant that, so long as the tenant agrees to a “continuous operation” covenant, such tenant can have the ability to close for business, pay less rent or terminate their lease if one or more of the other stores in the shopping center close for business. Although granting a tenant this type of “co-tenancy provision” is a useful negotiating tool, it re-enforces the importance of obtaining “continuous operation” covenants in the other leases in the shopping center.