COVID-19 threw a monkey wrench into the status quo of usual operations in the retail industry. State mandated shut downs of shopping centers combined with social distancing practices have created panic for both tenants and landlords. It is critical that landlords and tenants work collaboratively to find mutually beneficial solutions for their current leasing arrangement in order to keep their centers vibrant in the post-COVID-19 world. While reducing rent is often the first consideration for the parties, operating clauses are important to revisit for many retailers hesitant to commence operations. Continuous operation and co-tenancy clauses should be modified or considered in negotiations to reflect the reality of the COVID-19 pandemic.
- Go Dark / Recapture Provisions.
Many retail leases require the tenant to remain in continuous
operation of its space to ensure the necessary foot traffic needed
to generate business in an active shopping center. A prudent
landlord will impose certain days and hours of operation that the
tenant must be open for business. In the usual scenario, continuous
operation clauses tend to benefit both parties (tenants make more
sales, and landlords benefit from more traffic). However,
sometimes a tenant with strong bargaining power (think big box
retailers) will negotiate the right to "go dark" in its
space. "Go dark" provisions allow a tenant to cease
operations in its space while the tenant continues to pay rent.
This is a valuable provision for tenants who are operating in an
unprofitable space. Large national retail tenants often
carefully consider the cost to vacate a space (while continuing to
pay rent) against potential unprofitability at the space prior to
signing a lease. Of course, landlords are hesitant to agree
to allow their tenants to "go dark" and risk empty space
and less foot traffic in their centers. One way that
landlords can respond to requests to "go dark" is to
require the right to recapture the space, which leaves open the
possibility of renting the space to a more profitable tenant.
State imposed shut downs due to the COVID-19 pandemic have
required many non-grocery or non-essential tenants to cease
activity in their spaces. Parties may consider the right of
tenants to temporarily "go dim" and reduce store hours as
ways to modify continuous operation clauses as governmental
mandates are lifted.
- Co-tenancy Provisions. Co-tenancy provisions are extremely valuable for a tenant, as they provide the right not only to cease operations, but also to stop paying or abate rent. Co-tenancy provisions are triggered (i) when a specific tenant (most often anchor stores/department stores responsible for driving substantial traffic to a location) moves out of the center or ceases operations, or (ii) if the center's vacancy falls below a stated threshold. Landlords should carefully review such requests in light of the desired mix of tenants in their center. A landlord may consider (i) restricting the exercise of co-tenancy provisions as a result of temporary shut downs due to COVID-19, and (ii) imposing time thresholds that an anchor tenant must cease operation prior to a co-tenancy provision being effective.
The parties must also acknowledge that operating and co-tenancy provisions have long term implications. National tenant retailers should carefully consider the state and region of their stores as a factor in exercising any rights to go dark or dim. Ceasing operations could disrupt a relationship with a national landlord or shift existing customers to a competitor. A careful review of existing lease terms is a must for both landlords and tenants in response to the coronavirus.
Originally published May 19, 2020
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