CRE Leases and Continuous Operations Clauses: Can Landlords Force Tenants to Remain in Business?

An important issue to watch for in 2018 as traditional, brick and mortar retailers continue to face significant financial challenges is that of the Continuous Operations clause in CRE leases.

A Continuous Operations clause in the lease of a shopping center is a covenant that requires the tenant to operate its business in the leased premises continuously throughout the term of the lease. Through continuous operation clauses, landlords seek to assure themselves of rental income from tenants, which usually serves as one form of collateral for landlord’s secured creditor(s), and to ensure that their shopping centers will not have any vacant stores. These clauses are coming under increased scrutiny lately as distressed retailers seek to close “underperforming” locations without filing for Chapter 11 bankruptcy protection, which would otherwise allow the tenant (as debtor-in-possession) to assume or reject leases. Landlords, however, are fighting back, bringing litigation to enforce Continuous Operations clauses and stop “underperforming” tenants from trying to close up shop without filing for bankruptcy protection. 

A recent court decision in Indiana is one that landlords should take note of regarding the enforcement of Continuous Operations clauses. In Simon Property Group LP v. Starbucks Corporation, the landlord, Simon Property, had Continuous Operations clauses in each of its leases for seventy-seven (77) of Starbuck's Teavana stores throughout the United States. (Simon Prop. Grp., L.P. v. Starbucks Corp., 2017 WL 6452028 (Ind. Sup. 2017)). Starbucks announced it would be closing all of its Teavana stores nationwide, and Simon Property sued to enjoin them from closing their stores located on sites owned by Simon Property. In November 2017, the Indiana Superior Court granted a preliminary injunction compelling Starbucks to keep the Teavana stores open throughout the length of the trial based on the Continuous Operations clauses contained in the leases. Accordingly, in issuing the preliminary injunction, the Court found that Simon Property was likely to succeed at trial and to receive a permanent injunction compelling Teavana to remain open until the expiration of its leases. While Simon and Starbucks were eventually able to reach a resolution, this case is important for landlords seeking ways to enforce their rights under CRE leases.  If more courts choose to enforce Continuous Operations clauses and, thereby, compel underperforming tenants to remain in place, landlords may have more time to determine how they will utilize space that they know will eventually become available as some tenants choose not to renew their leases. While this might not resolve long term vacancy issues, including a Continuous Operations clause in CRE leases and understanding how to ask a court to enforce such a clause does provide some certainty in terms of how landlords can plan for future events.

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