Top 10 Issues In Negotiating Go Dark Provisions In Retail Leases
It is not uncommon for a tenant in a major tenant lease transaction, or a tenant with a significant amount of bargaining leverage, to refuse (or attempt to refuse) to agree to a continuous operating covenant in a retail lease. These tenants insist upon the flexibility of being able to close their businesses, or "go dark," if economic circumstances warrant. After all, it may be more economically prudent for the tenant to simply pay rent, instead of being obligated to continue to operate at a loss, while paying rent.
Landlords dislike go dark provisions, for a multitude of reasons. Go dark provisions may result in closed premises in the landlord's shopping center, causing a perception of blight or failure and a loss of tenant synergy and corresponding loss in value through lower rents. If other tenant leases contain co-tenancy provisions that require a number of tenants to be open (or the particular tenant that goes dark to be open), then the go dark provision could impact and trigger co-tenancy rights and remedies in the other leases. If the landlord is relying on, or expecting, percentage rent, the tenant's closure under a go dark provision will cease any potential payments under that provision.
Notwithstanding the negative impacts, over time landlords have come to grips with these provisions. This article will briefly discuss the top ten issues in navigating through go dark provisions.
1. Opening Covenant. Even if the landlord is willing to permit the tenant to go dark or close at any time during the term of the lease, the landlord should attempt to minimize its risks by insisting upon at least a one day opening covenant. This would require the tenant to open for at least one full day as a fully fixturized, stocked, staffed and merchandised store of the type required by the lease. The practical expectation would be that, after expending the significant amounts of money in order to open, the tenant would operate for a reasonable period of time before deciding to close its store. If the landlord has greater leverage, then the landlord may be able to negotiate an agreed operating period (e.g., one to five years or so) before the tenant will have the ability to exercise its go dark right.
When negotiating the opening covenant, it is also important to clearly document the parties' agreement as to when the tenant will be required to open. The landlord should ensure that the tenant is required to open near the commencement date (or rent commencement date) of the lease or within a negotiated period of time thereafter. Otherwise, a tenant may take the position that it may open any time during its lease term – which may be 10 years down the line – hardly what the landlord would have intended, and serving virtually no useful purpose for the landlord.
2. Notice of Go Dark. Prior to the tenant electing to cease its business operations from the premises, the landlord should try to require the tenant to provide the landlord with a reasonable amount of written notice of the intent to go dark (i.e., 90 to 180 days). The landlord can use this to prepare and get a jump start on finding a new potential tenant for the premises, and to minimize the time the subject premises will be vacant. The tenant may object, because it may, in effect, add to the amount of time the tenant is “required” to be open at the premises. For example, if the tenant has a one-day opening covenant, but cannot go dark without 90 days’ notice, then, in effect, tenant must operate for 91 days.
3. Tenant not in Default. In order for a tenant to exercise its go dark right, the landlord should require that, at the time of the exercise, the tenant not be in default of its lease beyond applicable notice and cure periods. From the landlord’s point of view, the go dark right is a privilege. If the tenant is in default, then the tenant should not have the right to avail itself of the privilege of this right. From the tenant’s point of view, if it is in default, then the landlord should exercise its rights and remedies for a default, but not remove its go dark rights. However, a landlord's rights and remedies for a tenant default may be more harsh and limiting for a landlord, and it may be more advantageous for the landlord to keep the tenant operating and preserve its default remedies.
Following a similar rationale, some landlords try to make go dark rights personal to the initial tenant of the lease – meaning only the initial tenant can exercise the right. Here the thought is that the go dark right is a unique, bargained-for privilege that the landlord would not provide to just anyone. The initial tenant may have had the creditworthiness, tenant draw and bargaining strength sufficient to elicit a go dark provision from the landlord, but an assuming tenant or subtenant may not.
4. Tenant to Continue Paying Rent. The go dark provision should be clear that notwithstanding the tenant's election to cease operating from the premises, the tenant must continue to pay all rent charges as and when they come due under the lease.
5. Tenant to Continue to Perform all Other Obligations. The go dark provision should also make clear that the tenant shall continue to fully and timely perform all of the other terms and obligations of the tenant under the lease. The only requirement under the lease the tenant will not be required to satisfy is the obligation to be open and operate its business from the premises. In addition to the rent provisions, the tenant must continue to satisfy the repair and maintenance provisions of the lease, the insurance provisions and all of the other obligations of the tenant.
6. Landlord's Right to Recapture. In the event the tenant elects to go dark, the landlord should insist upon an ability to recapture the premises, as a final resort. Although this would end the stream of rental income from the tenant, it would enable the landlord to control the use of its real estate by being able to re-lease the space to a user of its choice (who may be obligated to operate its business in the premises continuously). When negotiating this provision, the landlord should try to provide that the recapture right may be exercised at any time after tenant’s cessation of business, upon reasonable notice. This will enable the landlord to locate a replacement tenant for the premises and continue to collect rent from the existing tenant during the process. However, sometimes, tenants require the landlord to make its recapture decision within a short window (or periodic windows) following the tenant’s closure – perhaps because the tenant is also looking for a replacement tenant and does not want to compete with the landlord in this process. If this is the case, the landlord will have to take a risk and recapture/terminate without having a replacement tenant (and therefore, potentially suffer periods without receiving rent for the premises), or not recapture and take the chance the tenant will assign to another party, and have a dark space in its center during the process.
7. Payments by Tenant. In the event the lease is ultimately recaptured by the landlord and terminated during the initial term as a result of go dark scenario, the landlord should attempt to get reimbursed by tenant for certain costs. Most commonly, in the event the landlord provided a tenant improvement allowance at the outset of the lease, the landlord may try to collect the unamortized portion of such allowance (amortized on a straightline basis over the initial term) as of the termination date. Another common cost to collect is the unamortized brokerage fee(s) paid by the landlord in connection with the lease. From the landlord’s point of view, the landlord did not receive the full amount of what it bargained for in connection with these amounts as a direct result of the tenant’s actions. The tenant may counter that it would have paid rent for the entire term, and that it was the landlord’s decision to terminate the lease. How this issue is resolved depends on the relative bargaining strengths of the parties involved.
8. Payments by Landlord. Sometimes a tenant may request a landlord to pay certain costs following a landlord recapture after a go dark. This is most common in connection with a ground lease where the tenant constructs all of the improvements on the parcel at the tenant’s cost. Following the recapture, the landlord will own the improvements. The tenant may argue that it is unfair and unjust enrichment for the landlord to acquire what may amount to multi-million dollar improvements without having to pay the unamortized costs of those improvements. Again, how this issue is resolved will depend on the situation and the relative strengths and positions of the parties.
9. Tenant Right to Cure/Re-Open. Often times a landlord recapture right will provide that the landlord will provide the tenant with notice that the landlord is recapturing within a determined period. The tenant may want the ability to nullify the landlord's recapture/termination right by committing to re-open within the landlord’s termination notice or other negotiated period. This may be advantageous to the tenant, as it may serve to keep tenant’s competitors out of its market. The landlord should try to avoid granting these rights, as they may have a chilling effect on the landlord’s ability to negotiate with possible replacements.
10. Go Dark not Exercisable During Options. If a lease contains an option to extend, the landlord should attempt to restrict the ability of the tenant from being able to exercise its go dark rights during any option period. If the tenant is concerned that its business is not going to be able to successfully operate during the option period, then the tenant should not exercise the option. Tenants will argue that an option period is too long to be able to forecast the profitability and success of their businesses. This issue too will usually be resolved based on the relative strengths of the parties.
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Go dark provisions have many parts and are complicated. This article touches upon some of the issues that commonly arise in a go dark negotiation. How these and other issues are resolved will depend upon many factors, including the parties' relative understandings of what motivates each party in connection with each issue and the relative bargaining strengths of those involved.