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COVID-19: Operating Clause Considerations for Retail Tenants and Landlords

May 19, 2020

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. 

  1. 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.
     
  2. 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.

Shipman & Goodwin attorneys are available to help landlords, tenants and property owners navigate difficult situations in light of the ever-changing rules and orders being issued on the state and federal level during the COVID-19 pandemic. We will endeavor to analyze and explain the relevant law in these areas and related considerations, and update our Coronavirus Resource Center (specifically, the Real Estate Leasing page) periodically to include relevant Connecticut, New York, federal and local laws, rules and regulations that are enacted during this crisis, as well as court filings and relevant precedent or other topical information, which are being circulated on these matters.

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