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Going Dark

Almost all landlord oriented retail leases, particularly those which provide for payment of percentage rentals in addition to minimum rentals, contain operating covenants which require the tenant to remain open in the demised premises and conduct business for certain minimum hours. Often these operating covenants are quite comprehensive in scope, especially in the case of regional shopping center form leases.

In addition to requiring the tenant to remain open for certain minimum hours, they often require the premises to be fully stocked with merchandise and fully staffed by sales personnel, and require the tenant to conduct business in a manner "that will produce the greatest gross sales possible." In many cases, these clauses impose liquidated damages upon the tenant for failure to be open at specified times. Sometimes these liquidated damages merely double or triple the minimum rent; sometimes they use gross sales from prior operating years as a basis to compute the amount of damages payable by the tenant for its failure to open.

The great majority of retail tenants whose businesses are unsuccessful simply cease operations and disappear even though their leases contain operating covenants. However, if the tenant has substantial assets, "going dark" exposes it to an action for damages resulting from a breach of the operating covenant contained in the lease (i.e., the tenant's failure to stay open). While courts generally refuse to award damages from this type of default which are speculative, i.e., cannot be proved with reasonable certainty, it is possible that a landlord could prove damages resulting from a tenant's failure to operate in the form of lost percentage rental and other monetary damages with the expert testimony of shopping center or retail economists.

Sophisticated tenants with adequate leverage at the time the lease is negotiated often bargain for a clause which gives them the right to discontinue such operations notwithstanding the presence of the operating covenant in the lease. The following clause permits the tenant to discontinue operations, and if the tenant does so pursuant to the provisions of the clause, it will not constitute a default under the lease. This avoids the possibility of damages or injunctive relief for the tenant. Even though the tenant's lease is subject to termination by the landlord if the tenant goes dark pursuant to the clause, the tenant would no doubt be delighted if the landlord exercised its termination right since it would relieve the tenant of its obligation to pay minimum rentals and other charges due under the lease.

The clause provides that the tenant can notify the landlord that it intends to cease operations three months after it notifies the landlord of its intention. Note that the clause obligates both parties to attempt to secure a successor tenant and gives the landlord the right to terminate in the event the tenant does cease operations.

When a tenant proposes this type of clause, the landlord's response might be a proposal that the lease contain in addition a termination right in favor the the landlord if the tenant does not reach a certain sales level, even if the tenant does not discontinue operations (i.e., essentially a performance clause which would operate to the landlord's benefit).

Finally, the following clause may represent a compromise for the deal with a tenant who flatly refuses to sign a lease with an operating covenant, and a landlord who insists that the lease contain such a clause.

Tenant's Right to Discontinue Operations (Sample Clause)

Notwithstanding anything to the contrary contained in the lease concerning obligations of the Tenant to continuously operate its business in the demised premises, including, without limitation, Paragraph ___ of the lease, Tenant shall have the right to discontinue retail operations in the demised premises upon three (3) months prior written notice of its intent to do so to Landlord. During such three (3) month period, both Landlord and Tenant agree to use their best efforts to find a successor tenant for the demised premises. Notwithstanding the fact that Tenant has discontinued retail operations, Tenant shall nevertheless continue to pay all rent as due under the lease. In the event Tenant discontinues its retail operations as provided herein, then Landlord may elect to terminate Tenant's lease upon sixty (60) days prior written notice of Landlord's intent to so terminate. All rental payable under the lease shall be prorated as of the effective date of such termination in the event Landlord elects to exercise its right to terminate as provided herein.

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