A continuous operations clause is a contractual provision, typically found within a lease agreement, that obligates a tenant to operate its business continuously on the leased premises throughout the stipulated lease term. This clause is a significant component of Commercial real estate law, particularly prevalent in retail leases and oil and gas leases. Its primary purpose is to ensure that the leased space remains actively utilized, generating foot traffic or production, which benefits the landlord and, in commercial settings, often other tenants within a larger property like a shopping centers.
History and Origin
The continuous operations clause gained prominence in commercial leasing as retail environments, such as shopping malls and strip centers, evolved. Landlords sought to create dynamic and economically viable properties where the presence and activity of one business could attract customers for others. By requiring tenants to maintain continuous operation, landlords aimed to safeguard their investment by ensuring a steady flow of foot traffic and preventing vacant storefronts, which could diminish the overall appeal and profitability of the property. This contractual tool helps landlords maintain rental income and a vibrant tenant mix.9
Concurrently, a similar concept developed in the realm of oil and gas leases. In this context, a continuous operations clause permits the lessee to continue drilling or production activities even if the primary lease term has expired, provided that operations commenced before the expiration date and proceed without significant interruption. This allows lessees adequate time to fully develop the leased area, maximizing the extraction of resources.
Key Takeaways
- A continuous operations clause mandates that a tenant actively conducts business on the leased premises for the entire duration of the lease.
- It is most commonly found in retail leases and oil and gas leases.
- For landlords, the clause helps ensure consistent rental revenue, preserves the overall value of their property, and maintains a desirable tenant mix in multi-tenant commercial properties.
- Failure to comply with a continuous operations clause can lead to a breach of contract, potentially resulting in financial penalties or lease termination.
- The specifics of continuous operation, such as operating hours and merchandise levels, are often detailed within the clause and are subject to negotiation.
Interpreting the Continuous Operations Clause
Interpreting a continuous operations clause involves understanding what constitutes "continuous operation" in the context of the specific lease agreement and the industry. In retail leases, this typically means maintaining regular business hours, adequate staffing, and a sufficient inventory level to serve customers. The clause may specify minimum operating hours, days of the week, or even the percentage of the leased space that must be actively used for business. The goal for the landlord is to prevent a tenant from "going dark" or significantly scaling back operations, which could negatively impact the vibrancy and attractiveness of the entire property.
In oil and gas leases, the interpretation focuses on the continuity of drilling, reworking, or production activities. It ensures that the lessee is making diligent efforts to develop and produce from the leased property, preventing the lease from terminating due to inactivity, even if the primary term has ended. The specific requirements for maintaining continuous operations are crucial for both the tenant and the landlord, as they define the obligations and potential consequences of non-compliance.
Hypothetical Example
Consider a popular bookstore, "The Literary Nook," which signs a 10-year lease agreement for a prime space in a bustling shopping centers. Their lease includes a continuous operations clause that requires them to be open at least six days a week, from 10 AM to 8 PM, and to maintain a diverse inventory of books.
Five years into the lease term, the owner of The Literary Nook faces declining sales due to increased online competition. The owner decides to close the physical store to cut losses, planning to continue operations solely through their website. However, because of the continuous operations clause, simply closing the store would put them in default of their lease. The landlord could then pursue legal remedies, potentially seeking compensation for lost revenue or even terminating the lease and holding the tenant responsible for the remaining rent. The continuous operations clause prevents the tenant from unilaterally ceasing physical operations, even if they continue to pay rent, because the landlord relies on their presence to attract customers to other stores in the center.
Practical Applications
The continuous operations clause plays a vital role in various sectors, particularly within Commercial real estate.
- Retail Sector: In shopping centers, these clauses are critical for maintaining tenant synergy. The presence of anchor tenants (large, well-known stores) often drives customer traffic, benefiting smaller, inline tenants. A continuous operations clause ensures that these anchor tenants remain open, preserving the overall attractiveness and value of the property for the landlord and other businesses. Landlords also use these clauses to assure themselves of rental revenue, which can serve as collateral for secured creditors.8
- Oil and Gas Industry: In oil and gas leases, these clauses allow for the uninterrupted development of resources. They ensure that lessees can continue drilling and production activities beyond a primary lease term, as long as operations were initiated before expiration and are maintained without cessation.
- Legal Enforcement: Landlords have increasingly sought to enforce continuous operations clauses, especially in periods of retail distress. For example, in 2017, Simon Property Group successfully obtained a preliminary injunction compelling Starbucks to keep its Teavana stores open, based on continuous operations clauses in their leases, despite Starbucks' intention to close them nationwide.7 This highlights the enforceability of such provisions in certain jurisdictions.
Limitations and Criticisms
While beneficial for landlords, continuous operations clauses can impose significant burdens and limitations on tenants. Tenants may find themselves compelled to operate a business at a loss, particularly in declining markets or during unforeseen economic downturns. This can lead to substantial financial strain, as tenants might be forced to incur operational losses to avoid a breach of contract.6
Furthermore, the enforcement of a continuous operations clause can be complex and may lead to litigation. Courts historically have been hesitant to grant specific performance—an order compelling a party to fulfill a contractual obligation—due to the difficulty in supervising ongoing business operations. Instead, landlords often pursue monetary damages for losses incurred due to a tenant's closure. Ten5ants frequently express reluctance to include these clauses, as they restrict flexibility in managing their business operations, brand strategy, and profitability, making it difficult to close an unprofitable location even if it would be more economically sound to do so.
##4 Continuous Operations Clause vs. Go-Dark Clause
The continuous operations clause stands in direct opposition to a go-dark clause. While a continuous operations clause requires a tenant to remain open and actively conduct business, a go-dark clause provides the tenant with the right to cease business operations at a leased space while continuing to pay rent.
Go3-dark provisions are typically more favorable to the tenant, offering flexibility to close an unprofitable location without being in default of the lease agreement. Landlords generally dislike go-dark clauses as they can lead to vacant spaces, reduced foot traffic for other tenants, and a diminished overall appeal for the property. To 2mitigate the risks of a tenant "going dark," landlords often negotiate protective measures, such as a recapture right, which allows the landlord to terminate the lease and seek a new tenant if the existing tenant exercises their right to cease operations.
##1 FAQs
What happens if a tenant violates a continuous operations clause?
If a tenant violates a continuous operations clause by ceasing business operations, they are typically considered in default of their lease agreement. This can lead to legal action by the landlord, who may seek remedies such as monetary damages for lost rent or other losses, or even termination of the lease.
Are continuous operations clauses common?
Yes, continuous operations clauses are very common, especially in retail leases within shopping centers. They are also a standard feature in many oil and gas leases, where they ensure ongoing exploration and production activities.
Can a continuous operations clause be negotiated?
Like many aspects of a lease agreement, a continuous operations clause is often subject to negotiation between the landlord and tenant. Tenants may try to negotiate for exceptions, such as temporary closures for renovations, force majeure events, or specific periods of low business activity, to introduce more flexibility.
Does a continuous operations clause apply to all types of businesses?
While most prevalent in retail leases and oil and gas leases, continuous operations clauses are less common in other types of Commercial real estate, such as office or industrial leases, where the tenant's physical presence is not as directly tied to the overall property's success or the landlord's revenue generation.