How Not to Go Dark at a Shopping Center: Advice for Tenants (and hope for landlords)

Landlords and major retail tenants frequently argue about including “continuous operations” provisions in their leases. These provisions make it an affirmative obligation of the tenant to stay open for business, subject to whatever limitations are included in the actual lease language. Tenants generally want the flexibility to close a store. This allows them to get out of an unprofitable location or even to move to “better” quarters down the block. Landlords want the assurance that their major or anchor tenants stay in place to bring traffic and life to their centers. This helps them attract and retain other tenants and makes financing a great deal easier.

In the absence of specific lease language dealing with “continuous operation” or some other express arrangement, courts have looked to other facets of the lease or other agreements to decide if a tenant can pull out of its premises (“go dark”). To avoid the possibility of an implied “continuous operation” obligation, tenants often insist on an explicit lease provision rejecting the notion that the tenant is bound to continuously operate on the premises. Frequently, a tenant believes that if it obtains such a provision it can “go dark” and even move to a competing shopping center. In a recent unreported New Jersey court decision, Berardi v. Acme Markets, Inc., one tenant who thought it could do that got a rude awakening.

Construing a “no continuous obligation” lease provision in light of the circumstances under which it was written, the Court found that the clause was intended to relieve the tenant of continuing to operate under circumstances in which continued operation would mean continued unjust losses. It thereby found that the clause was not intended to permit the tenant to move its business at will to a new location while inflicting harm on the old one. The clause was found to be a shield for luckless tenants and not a sword against a landlord. The Appellate Division further emphasized that the covenant of good faith and fair dealing that is implied in every contract means that “neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.”

Here, the landlord was permitted to pursue its claims against its tenant. This specific outcome has little predictive value because outcomes in “going dark” cases are extremely dependent upon the specific facts involved, the bargaining strengths of the parties, the relative equities, and the specific lease language. Consequently, it is critical to focus on this issue in the initial letters of intent, subsequent negotiations, and, most especially, in the drafting of the resulting agreement of the parties. Litigating “going dark” disputes is an expensive exercise undertaken in pursuit of an uncertain outcome. Using experienced and talented legal counsel, such as our firm, goes a long way toward ensuring that the intentions and agreements of the parties are given legal effect should a dispute arise.