How Can One Enforce A Continuous Operation Lease Provision? Not Easily.

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Rarely will a court enforce a continuous operation obligation by ordering a tenant to stay in business at its leased space. Yet, from time to time a landlord will seek an injunction to force a tenant to keep its store open. A simplistic explanation as to why courts don’t issue such orders is because landlords need to show an irreparable injury, and if a landlord can be compensated by the payment of money, its injury isn’t irreparable.

Landlords confronted with a tenant bound by a covenant to be “open and operating,” but on the verge of breaching that obligation by closing its store, usually plead the “domino effect,” expressed by Benjamin Franklin thusly:

For the want of a nail the shoe was lost,

For the want of a shoe the horse was lost,

For the want of a horse the rider was lost,

For the want of a rider the battle was lost,

For the want of a battle the kingdom was lost,

And all for the want of a horseshoe-nail.

In the case of these landlords, the nail is the defaulting tenant; their kingdom is a shopping mall. The irreparable injury being claimed is that if this one tenant closes, others will follow and the mall will fail.

That’s the background for today’s blog posting. For the last few months, we’ve been pondering an April 2020 decision from a New York appellate court. A lower court had issued a preliminary injunction against an upscale apparel retailer, one of 163 tenants at an approximately 1.4 million square foot shopping center. It was not an anchor store. Though the appellate court threw out the injunction, there was (to us) a troubling dissent, one that agreed with the lower court. Ruminations thought it should have been a “slam dunk” for the tenant. However, the lower court judge and two of those on the appellate court thought otherwise.

The tenant had the right to terminate its lease if certain sales levels were not met. At one point, it exercised that right but then agreed to stay at a reduced rent coupled with the right to terminate its lease if, at the end of the next year, sales were still below the stated threshold. A year later, it gave notice that its sales were still below the agreed-upon level and that it would be closing its store. The landlord performed an audit and concluded that the store had underreported its gross sales by deducting promotional discounts. On that basis, the landlord asked a court to enjoin the tenant from closing its store until the court determined which sales figure conformed to the lease’s definition of gross sales.

Interestingly, the lease had a liquidated damages provision directed to a situation where, if the store closed in contravention of the lease’s continuous operation provision, the landlord would be entitled to recover 150% of the tenant’s minimum rent. The clause even explained that the reason for this measure of damages was to compensate the landlord for “loss of value in the property because of bad publicity or appearance by Tenant’s actions … if Tenant shall … vacate the Demised Premises or cease operating its business therein.”

As Ruminations would express it, the tenant had two “sanctioned” ways to avoid its obligation to “remain open and operating.” The first was “free.” If the tenant’s gross sales fell below an agreed-upon level, it could leave the mall at no cost. Under any circumstance, it could leave the mall and incur a higher rent.

The appellate court fully understood that the tenant might have understated its sales and if that turned out to be the case, the tenant did not have the right to terminate its lease. But, at the same time, it understood that the tenant had the right to default under the lease and suffer the consequences. To the majority, the landlord and tenant had agreed, in advance, what those damages would be: the obligation to pay 150% of the minimum rent. [In New York, a landlord has no obligation to mitigate its damage or to re-let vacated premises.] Though the landlord argued it would be irreparably harmed by the store’s closing, the majority concluded that whatever harm the landlord might incur was contemplated to be part of the 150% rate. To these judges, this measure of “liquidated damages” encompassed the landlord’s loss of goodwill and the loss of other tenants whose own leases gave them the right to terminate the lease if this particular tenant closed its store.

The majority’s holding comports with Ruminations’ general understanding about how reluctant (perhaps an understatement) courts are to force a tenant to remain in business.

What troubles us is how the dissenting judges saw the issue. They focused on whether a party was entitled to a preliminary injunction when it was likely that it would succeed on the merits of its case. In this case, that meant whether the landlord would successfully prove that the tenant’s gross sales, properly calculated, exceeded the “kick-out” level. It also agreed with the landlord that its kingdom could be lost if this nail, the tenant, was lost. Apparently, the landlord had included this tenant as a “Named Retail Tenant” or an “Upscale Tenant” in a number of other lease’s co-tenancy provisions. To the dissenting judges, this meant that the landlord would not only lose the tenant in front of the court but also others to the tune of an undeterminable monetary loss. These two judges saw this as a “loss of goodwill” and the cause of irreparable harm to the landlord. As a result, these two judges would have “mitigated” the landlord’s harm by ordering the tenant to remain open.

We’re not too concerned that the dissent will start a trend, but are alarmed that three judges would have overridden what the parties had specifically agreed to be the outcome if the tenant closed its store in breach of a specific obligation to remain open. On the other hand, in April, New York was reeling from the current pandemic. Perhaps this influenced the judges, in that they sought (or would have sought) to ameliorate the impact of coronavirus closings on the retail industry. Though this wasn’t a “coronavirus” closing, maybe they were looking ahead and feared that strong chain stores might start to “clean up” their portfolio of locations by selectively closing stores.

We concede that looking into the minds of these judges is unsupported speculation on our part. But, what isn’t speculation is the following assertion. This landlord caused its own problem by using this particular tenant to obtain later leases. It took the risk that this tenant would go out of business. It may have believed such a situation wouldn’t occur, but it gave this tenant two ways to close its store. One was the sales “kick-out” allowing the tenant to terminate its lease without paying further rent. The other was by setting a “price” the tenant could pay if it chose to close its store. The tenant didn’t induce its landlord to promise other tenants the right to terminate their own leases on a co-tenancy failure. Instead, the landlord used this tenant to get further leases. The landlord assumed the risk in return for a 150% rent provision.

There is a lesson here. The landlord had no realistic expectation that this tenant would choose to close its store. That’s pretty much the situation we all saw at the beginning of this year. No one had any realistic expectation that a virus would create turmoil for retailers. So, we ask: “Can a landlord dare to accept a co-tenancy requirement? Can future tenants expect to get a co-tenancy clause? How long will it take, if ever, before we all forget the parable linking a nail with a kingdom?”

[Our research seems to show that this tenant is still open for business at the mall. Perhaps the parties reached a new agreement.]

[Oh, yes – if you want to read the appellate court’s decision, click: HERE. Sharp Ruminators will have seen this decision as part of our May 3 blog posting.]



  1. Steve Cross says

    Hello, Ira. I realize this article is focused on retail leases, but am curious if you may be aware of whether a revenue threshold or co-tenancy provision have been utilized by tenants in office or warehouse leases.

    • No, I haven’t thought it might be a good idea for some start-up tenants to ask for where they have bargaining power. They might ask for a kick-out if their business volume exceeds a certain level, something I wouldn’t expect to see in a retail situation. Perhaps a reader can offer up her or his experience or thoughts.

  2. Jason Kirkham says

    My work heavily focuses on industrial/warehouse leasing, and neither co-tenancy nor termination rights tied to operating volumes are common.

    Also, because of the nature of industrial leasing, continuous operation clauses are quite rare. Instead, the tenant will breach the lease if it “abandons” the premises. I haven’t seen any decisions construing that requirement, but I believe that it means that the tenant can cease operating so long as it continues to perform is maintenance, repair and insurance obligations under the lease.

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