Commercial retail tenants need the ability to “go dark” or shut down their business, at least on a temporary basis, but landlords want their retail tenants to operate on a continuous basis, especially if percentage rent or co-tenancy provisions are involved. To add to this mix, we are finding that some retail tenants are now using their continuous operation provisions to create some leverage with their landlords.
In today’s issue, we raise eight suggestions when preparing the continuous operation language in your retail lease.
Alan KatzMintz & Gold LLP
Going Dark For a Bit
Okay, I too am sick of everything COVID.
Tired of going nowhere and seeing nobody, tired of working from home and tired of Zoom calls (except when I use my cat filter).
And can’t anyone make a mask that does not fog up my glasses?!!
I am living the old Jethro Tull song “too old to rock n’ roll but much too young to get a vaccine”.
As much as I whine, I do get it that wearing a mask and social distancing will let us beat the virus.
Apparently, the Scots have figured this all out. Notwithstanding a fierce independent streak, they have managed to get most everyone on board about mask-wearing and lockdowns and have an infection rate only one-third that of England.
Health officials credit comedian Janey Godley, whose has been doing voiceovers of First Minster Nicola Sturgeon’s daily COVID briefings which are seen by more people than the real thing.
With voiceovers going full out Scot like “If I see any o’ yous oot there, I’m gonnae take a run and put a toe up the crack ae yer @%*, so quit it!” she has the country laughing and listening.
Social distance? She references Alsatians (German shepherd dogs).
Alsatians? “We’re told to stay two meters apart but not everyone knows what two meters is” says Ms. Godley “but everyone knows the size of an Alsatian.”
How does she do it?
“I just imagined a wee woman called Jeanette at the bus stop and how she would translate the briefings to her friend, wee Agnes,” she explains. “Did ye see that Nicola on the telly, we’ve no tae go oot, we’ve all tae stay in the hoose.”
Maybe we in the U.S. just need Dr. Fauci to dig down to his Brooklyn roots and tell us all to wear masks or “fuhgeddaboudit!”
It may feel at times that the darkness of 2020 is running into 2021, but in commercial leasing sometimes a retail tenant needs to “go dark” or shut down its business, at least temporarily.
Going dark has always been a big problem for landlords and they often include in their retail leases a continuous operation covenant.
Going dark can reduce the landlord’s revenue in a percentage rent lease (where the landlord shares a piece of the tenant’s gross sales).
In malls, a tenant going dark may trigger co-tenancy clauses in other leases (i.e., lease provisions that tie the operation of one lease to the operation of another lease).
And landlords and area tenants, whether in a shopping center or street retail, do not want empty storefronts dragging down the businesses that remain open.
As with everything else, COVID has changed calculations in unexpected ways.
My colleague, Matt Seminara, retail leasing guru extraordinaire and former in-house luxury brand retailer, has recently seen retail tenants going dark for leverage.
The typical remedy for a landlord when a tenant goes dark is to terminate the lease, but when a tenant struggling during the pandemic would be fine with just that outcome it can force the landlord to offer either lease concessions or a mutually acceptable termination.
Matt says that he has also seen shopping center tenants focusing on the reduced operations of other tenants to invoke co-tenancy violations by their landlords which can trigger reduced rent obligations and, after a period of time, even termination rights.
Retail tenants always need to focus on their continuous operation obligations but in today’s wacky COVID world that is truer than ever.
Pull up your kilt and follow these eight suggestions (from at least two Alsatians away, of course) when drafting your lease “go dark” provisions:
- Failing means yer playin! – Trying and failing, but at least you are trying. The most flexibility for a retail tenant is to not have any continuous operation obligation whatsoever and be able to close down for some period of time and pay rent (perhaps as part of a national strategy or a way to avoid future pandemics). Most landlords will only agree to an affirmative right to go dark after an initial period of operation and may require that for some time you not open another store within a surrounding “restricted area”.
- A nod’s as guid as a wink tae a blind horse” – Make your meaning crystal clear. Without limiting your right to stay open longer, you should clearly define continuous and limit the operation requirement to certain minimum standard business hours on business days.
- Yer a long time deid: Seize the day and live life to the fullest. You should exclude standard holidays (at your discretion) such as Christmas, Thanksgiving, New Years, etc.
- Patch aht: Let’s not do that. Make sure you have the right to a “temporary cessation” as long as you covenant to use diligent efforts to re-open as promptly as possible and to remain responsible for your lease obligations while closed. These temporary shutdowns will (i) allow you to perform repairs or alterations (with a time limitation, e.g., not to exceed 30 or 60 days in any 12-month period, other than for a major renovation), (ii) cover inventory analysis (with a much shorter time limitation, e.g., 3 to 5 business days), or (iii) provide any permitted assignee or subtenant time to perform its alterations (with a longer time period, e.g., 180 days).
- Noo jist haud on! – Take your time. We always include an exception to the continuous operation covenant for force majeure type events (e.g., condemnation or casualty).
- Now we also suggest that you specifically provide that a temporary closure or reduction in operations due to a resurgence of the COVID-19 virus not be deemed a breach of your continuous operation covenant.
- Going forward, your definition of force majeure should include pandemics similar to COVID-19 and you should cover as many situations as possible that might adversely affect your business including an event that (i) requires or recommends that employees of non-essential businesses stay at home and not be physically present in your geographic area, (ii) limits the number of persons that can be physically present or that can otherwise congregate in public spaces, (iii) limits public transportation or other traffic or movement of people in, to or from your premises or (iv) otherwise restricts or advises against the movement or congregation of persons. You must realize, however, that landlords will try to limit these situations to actual legal requirements and restrictions imposed because of a specific pandemic.
- You can also cover force majeure type events by making your continuous operation obligation conditioned upon a certain threshold of stores in a shopping center being in operation (e.g., 50%, but note Matt says he has seen as high as 80%).
- Dinnae teach yer Granny tae suck eggs! – Stop teaching someone something they already know. Naturally, continuous operation cannot be expected before your premises are completed so any “go dark” restriction should only start after you first open for business.
- Heid doon arse up! – Get on with it! When you do “go dark”, expect that you will need to agree to certain reasonable obligations, such as to (i) first complete your initial alterations and open for business at least for one day fully fixtured, stocked and staffed, (ii) keep the interior of the premises lighted during normal business hours, and (iii) maintain the exterior and all portions of the premises visible from the outside clean and orderly.
- Sometimes a landlord may require that you appear to operate as an ongoing business consistent with your trade name.
- If you are performing alterations, you may have to block the applicable portion of the premises from view by placement of a screen or other decorative device.
- Gonnae no’ dae that! – Don’t do that. Cessation of business is often deemed a recapture offer pursuant to which your landlord will have the option to terminate the lease. This may be just the result you are looking for but be sure that no recapture is triggered by a temporary cessation if you intend to resume operations.
We are told that Ms. Godley’s voiceovers have the prim Ms. Sturgeon dropping f-bombs and sighing at annoying questions. Pretty much how retail tenants react when reading their lease’s continuous operation covenant. Follow the eight suggestions above and “Lang may yer lum reek!”. Literally, long may your chimney smoke, but also a toast wishing you live long and healthy with a wee fine “go dark” provision.