Tenant’s Right to Go Dark; Landlord’s Right to Recapture

Commercial tenants typically want the right to “go dark” in the event that their businesses are not generating enough revenue. “Going dark”basically means that a business will stop operating while continuing to pay rent. This strategy can save tenants the cost of stocking and staffing the space they rent and will help allow them to get back on their feet.

However, if a landlord gives a tenant the right to go dark, they may want to also specify a recapture right which allows them to eventually take back the space and replace the tenant.

While an owner’s right to recapture is a reasonable trade off for a tenant’s right to go dark, a landlord will want to take steps to negotiate a broad recapture right that gives them sufficient leeway when exercising this option since many have a narrow time frame to make the decision.

"Going Dark"

In today's economic climate, many retailers are finding it more difficult to continue operations. We see this in large shopping malls where numerous empty stores pop up as more and more stores go bankrupt or cease business for a variety of reasons. Those empty stores do not necessarily indicate that the property is not leased. The lessee may have simply ceased to operate, or, in industry terms, have "gone dark." 

Most commercial lease provisions now contain tenant-driven terms that allow tenants to cease operations in a leased space if continuing to operate is no longer economically feasible. The "go dark" provision is basically a co-tenancy clause. Although some landlords still resist these clauses, more landlords have become more willing given the economic realities of multiple retail closures. In some contracts, a lessee may go dark but continue to pay a portion of rent to the landlord. However, the rent will be substantially decreased.

Benefits for Lessee

Cutting Losses - When a location is no longer profitable, a tenant will decide that paying rent without the additional costs of carrying inventory and paying salaries minimizes the losses.

Temporary Closing - In some cases, a retailer may need to "go dark" for reasons other than a failing business, such as major operation restructures or a brand overhaul. Without a "going dark" clause, the retailer would be in default for closing their doors. However, the clause gives them leeway to preserve the time and save the costs of not having to operate during the restructure or rebranding.

Exclusivity Clause - A retailer may have an attractive spot in the mall but is still not profiting. He or she might negotiate with the landlord to move to another area, but allow the first store to "go dark." This provision would be more of an exclusivity clause that prevents any competitors from utilizing the closed store.

Operating Covenants

An operating covenant is an agreement by the tenant to continuously operate its store for a set number of months or years and for a designated number of hours and days each week. Such covenants frequently appear in leases containing a percentage rent clause designed to ensure the tenant's sales are maximized. Strip centers and/or malls rely on an economic interdependence of stores, operating covenants are important to both the landlord and the various tenants as a means of maximizing traffic flow.

A poorly drafted operating covenant can give rise to litigation between landlord and tenant. If, for example, a tenant agrees to “continuously operate,” then is it required that the tenant fully stock and staff the store? From the landlord's perspective, percentage rents will not be maximized if the tenant operates at less than full capacity. The tenant needs to review the days and hours ofoperation and insist the clause only apply if a significant percentage of the tenants in the center are similarly obligated. A tenant agreeing to an operating covenant must be careful to negotiate for “excused periods,” which are exceptions to the covenant. Typical exceptions include events of casualty or condemnation, and down time the tenant will need to renovate or remodel.

The typical “go dark” provision presupposes that the tenant has operated its business at the location for the period of time required by any operating covenant contained in the lease.Because a “go dark” provision contemplates the possibility that tenant may reopen at a later date, landlords may negotiate for a secondary operating covenant, to commence upon tenant’s re-opening. While such a requirement may serve to dissuade a “dark” tenant from re-opening, it may also serve to dissuade a landlord from recapturing the dark space. Furthermore, this secondary operating covenant may encourage a landlord to accept a “go dark”provisions where it otherwise might not.

Landlord’s Right To Recapture the Premises:

In consideration for granting the go dark right, require the tenant to grant you the option to recapture the premises and terminate the lease without recourse at any time following the date the tenant vacates the premises. Many“go dark” provisions provide a mechanism whereby the landlord may take back, or recapture, tenant’s space after tenant “goes dark.” Tenants frequently argue that they should be compensated by the landlord for re-taking the space to which tenant is otherwise entitled, especially if the tenant has invested a considerable sum in the premises. Landlords argue, however, that they should not be required to pay a recapture premium because the lease contemplated an operating retail store and the presence of dark space adversely affects the performance of the remainder of the center. Furthermore, as tenant’s improvements are rarely usable by the landlord or a replacement tenant, landlords strongly argue against payment for such improvements. These negotiations often deadlock negotiations on “go dark” provisions.

Landlords and other tenants have a legitimate interest in keeping the shopping center populated with open and operating businesses. One method of addressing this concern is to give the Landlord the option of terminating the Lease to “recapture”the premises should Tenant cease operations for a period of time. On the other hand, it is one thing to allow a Tenant with an unsuccessful store to close its operations, and another to allow a Tenant to move a very successful unit “down the street” to a competing shopping center. Therefore, a Landlord may want to add a provision prohibiting its Tenant from opening another store within a given distance from the shopping center because if a Tenant did so, it would cannibalize the existing property.

Consult an Attorney

Negotiating a commercial lease can become very complicated and you want to ensure that the contract is to your benefit. Speak with a real estate attorney experienced with commercial leases to avoid any complications that might arise with contract negotiations.

No matter the type of property you own, you can count on the experts at Evanco Realty Advisors for the very best in full-service commercial administration. We provide everything you need to minimize your ownership workload and maximize the return on investment for each of your commercial properties.We provide peace of mind to owners, implement excellent property management services that enhance value for landlords.

Call us today at (619)814-1688 to see how our commercial property management strategies can help you!

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