Continuous Operation
Continuous Operation
Most retail landlords (and some office landlords) require continuous operation clauses in their leases. Continuous operation clauses require that the tenant remain open for business during center hours during the entire lease term. With a continuous operation clause, a tenant must not only pay rent, but also must be open for business. Landlords require continuous operation because tenants in shopping centers are interdependent on one another for success. A full, open center benefits all of the tenants and enhances the value of the property.
However, most retail and restaurant businesses operate with a thin profit margin. Their businesses have high costs for labor and product. There may be instances where the tenant may lose money by being open instead of temporarily closing its doors. While the tenant must accept that it cannot just close down for the summer in Phoenix (for example) to the detriment of the center, there are instances where the ability to temporarily close may be appropriate.
First, in the event significant road construction adversely impacts the primary means of access to the leased premises and/or center, the decrease in customer traffic could be devastating to the tenants in the center. Second, in the event the shopping center has high vacancy, it would be unfair to force a tenant to open and stay open in an empty center. In either case, rather than force the tenants to be open during all center hours, it may be fair to allow the tenants to close during non-peak hours, certain days, or for certain periods of time. For example, a tenant could negotiate that if the center has 50% or more vacancy, the continuous operation clause does not apply. Then if the center has 51%-75% vacancy, the tenant may have reduced hours so long as it is open during 75% of the overall shopping center hours. This type of negotiation is particularly important for yet-to-be-built, speculative centers.
A compromise position is that the landlord may want the right to recapture the space in the event the tenant does not continuously operate for a certain period (usually 90 days or more). While this may seem fair, the tenant should consider its initial costs of construction and marketing the new location and require that the landlord pay a reasonable recapture fee.
Prior to using any language or concepts from this blog entry, consult with an attorney.
Ryan Rosensteel is a real estate and construction attorney licensed in Arizona. You can contact him at rrosensteel@rrlawaz.com.