Tenant Leasing Illustrated
April 2017
Issue #63
Hello,

Although landlords expect their retail tenants to continuously maintain their operation at the landlord's premises, sometimes a tenant needs the ability to "go dark" and shut down its establishment.

In today's issue, we present eight suggestions to allow a tenant the flexibility when it needs to go dark.

Sincerely,
Alan
Alan Katz
Mintz & Gold LLP

An Oscar for Going Dark
Luckily, there were no lawyers involved, so this time we get to blame the accountants.

As you no doubt know by now, the Oscars ceremony managed to go off script when Warren Beatty and Faye Dunaway were handed the wrong envelope by Price Waterhouse (apparently distracted by their backstage tweets) and incorrectly anointed "La La Land" as best picture when the actual winner was "Moonlight".

That was hard to write, let alone watch, as the La La Land cast went on stage, thanked their moms and everyone else, and then as confusion took over, one of the La La Land producers had to (gracefully) announce that oops, this little statue goes to another movie.

Host Jimmy Kimmel adlibbed well saying "I knew I would screw this show up".

Next year a crack team from Mintz and Gold will replace Price Waterhouse and pass out the envelopes. We promise not to tweet backstage (heck, we do not even know how to tweet), but do intend to preen all over the red carpet.

If you think about it, many of us end up with something different than we originally thought (I thought legal life would be just like L.A. Law and when my wife married me, she thought, well, never mind).

In commercial leasing, it is sometimes the tenant that needs to leave the landlord all alone on stage and a good example is when a retail tenant needs to close down its business while continuing to meet its monetary obligations (known as "going dark").

Landlords naturally want their retail tenants to maintain the viability of their retail establishments and often enforce this wish with a continuous operation covenant.

Going dark can be a huge problem for a landlord in a number of ways.

This can directly reduce the landlord's revenue in a lease based on percentage rent (where the landlord shares a piece of the tenant's gross sales).

In a mall, 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), with remedies such as reduced rent or even termination.

Landlords (and other tenants in the area or shopping center) also do not want dark and empty storefronts dragging down the businesses that remain open.

That being said, retail tenants sometimes need to shut down their business, if nothing else on a temporary basis.

Let us shine a little (moon)light on going dark with the following eight suggestions:
  • Arrival (and sometimes departure); eliminate continuous operation altogether. The best remedy for a retail tenant is to not have any continuous operation obligation under its lease. This allows the greatest flexibility if you make the determination that ceasing operations but paying rent for a particular store is less expensive than staying open or more in line with a national strategy. Some landlords will only agree to an affirmative right to go dark after an initial period of time (e.g., 3 or 4 years of operation) and may require that you not open another store within a surrounding "restricted area" for some period of time.
  • (Not) Nocturnal Animals; clearly define continuous. If you are unable to eliminate the continuous operation obligation, it should at least be limited to operation during certain minimum standard and stated business hours on business days. Nothing, of course, should limit your right to stay open during other than the stated business hours and your lease should say so explicitly.
  • Silence (regarding your initial alterations). Perhaps obvious, but even your landlord does not expect continuous operation before your premises are completed so any continuous operation obligation should start after you first open for business.
  • Holidays: Made in America. Notwithstanding a continuous operation obligation, you should be entitled, in your sole discretion, to close on Christmas, Thanksgiving, New Years and other holidays that you designate from time to time.
  • Lion: cover unavoidable delays. You will need an exception to your continuous operation covenant for any force majeure type of event, including taking by condemnation or fire or casualty as provided under your lease.
  • Moonlight(ing): provide for "temporary cessation". You may need a temporary closing to handle other concerns; for example (i) to permit the performance of repairs or alterations (with a time limitation, e.g., not to exceed 30 or 60 days in any 12 month period), (ii) for inventory analysis (with a much shorter time limitation, e.g., 3 to 5 business days), or (iii) in order to assign or sublease the premises, including to provide any permitted assignee or subtenant time to perform its alterations (with a longer time period, e.g., 180 days). In such events, you can covenant to use diligent efforts to re-open the business as promptly as possible and to remain responsible for all of your lease obligations.
  • Fantastic (reasonable) Obligations and Where to Find Them. When you are entitled to "go dark", whether on a temporary or more extensive basis, you should agree to certain reasonable obligations. These include 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, (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, your obligation may be to block the applicable portion of the premises from view by placement of a screen or other decorative device.
  • Recapture by the Sea. Often a lease will provide that such cessation of business will be deemed a recapture offer whereby the landlord will have the option to terminate the lease. This may be a very good result for you if a true termination is intended, but be careful that no such recapture is triggered by a temporary cessation if you intend to resume your operations at the premises.
Sometimes when the house lights dim it means the end of the retail show, rather than the beginning. But if you follow the suggestions above, your lease will get the correct envelope and win the award for going dark in a leading role.

Please share with your colleagues
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About Us
Mintz & Gold prides itself on providing the highest quality legal representation often associated with large law firms with the attention and reasonable costs of a smaller law firm. Mintz & Gold's Real Estate Department has a national practice specializing in a broad range of commercial real estate law, with a particular focus on commercial leasing. We have extensive experience with respect to office, retail and shopping center leasing, and have represented major Manhattan landlords, national and multinational institutional tenants and national retail chains. Most of our attorneys practiced for many years at large institutional law firms before joining Mintz & Gold.

For more information regarding Mintz & Gold's real estate practice, click here.

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Contact:
Alan Katz
katz@mintzandgold.com
Telephone: (212) 696-4848
Fax: (212) 696-1231

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