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What is a Tenant’s Duty to Occupy Its Leased Premises?

What is a Tenant’s duty to occupy its Premises? Here, in outline form, is a discussion of the issues raised and the approaches landlords and tenants can take when a tenant wants to leave its premises or has already done so:

(a) Abandonment contrasted to “being vacant” aka “going dark.”

(i) What does it mean to “abandon” leased premises?

(A) To abandon the leased premises is for a Tenant to relinquish its right or interest in the leased property with the intention of never claiming it again. Normally that requires an understanding of the Tenant’s subjective intent, a very difficult “state of mind.” In some cases, however, that state of mind can be determined, such as when an entity tenant vacates the leased premises and is dissolved. Mere passage of time during a cessation of active use does not constitute abandonment. Although length of time is a factor to be considered, it is not the sole factor. Some discontinued uses are more readily revivable than others, and the passage of time must be considered in conjunction with all circumstances, including those that caused the cessation, the nature and quality of efforts being made to resume the use, and any other objective manifestations supporting or negating the owner’s expressed intent to continue the use. Further, just because a Tenant ceases using particular leased premises does not mean that it doesn’t intent to find a subtenant for those premises. Thus, if a Tenant is otherwise performing its obligations under its Lease, a Landlord of a Lease with an expressed definition of “abandonment” is without the ability to terminate the Lease or recapture the space.

(B) As pointed out above, merely leaving leased premises vacant does dot constitute abandonment. In fact, many retail Tenants refuse to agree to “continuous” operation clause, thus reserving the right to leave their space vacant. In such cases, they continue to pay rent, heat the leased premises, and perform all of their duties. In some cases, this is an acceptable situation for a Landlord. Often, it is not because:

1. Vacant space makes a project less desirable to potential tenants.

2. Vacant space scares potential lenders.

3. Vacant space invites crime.

4. Vacant space incurs higher insurance rates.

5. Vacant space depresses sales for other tenants at a retail project.

6. When a Tenant vacates space, it can be an early indication of pending financial problems.

As one can see, there is a qualitative difference between having a vacant retail anchor tenant space and having a small office on the eleventh floor of a thirty story office building vacant.

(ii) One step that can be taken in a Lease to deal with vacant leased premises is to make a vacancy into an “event of default.” Here is an example of such text:

A. … or (z) if the Premises shall become vacant or deserted, then, and in each and every such event (an “Event of Default”), at the option of Landlord, Tenant’s right of possession shall thereupon cease and terminate, and to the extent permitted by law Landlord shall be entitled to the possession of the Premises and to reenter the same… .

(iii) One step that a Tenant can take to preserve the right to “go dark” is to require a provision similar to this one:

A. Vacation of Premises. Notwithstanding anything contained or set forth in this Lease to the contrary, nothing set forth in this Lease shall be construed, in any manner whatsoever, as an express or implied covenant of continuous operation on the part of Tenant, and Landlord acknowledges that there is no covenant of continuous operation with respect to the Premises, arising hereunder or otherwise, express or implied, on the part of Tenant. If Tenant elects, in Tenant’s sole discretion, to cease business operations at the Premises, such cessation of business shall not be deemed a breach or default of this Lease, and Tenant shall remain liable for the performance of its obligations hereunder.

(iv) Tenants may wish to preserve a right to “go dark” at a particular location, and therefore will not want to covenant to continuously operate at the premises. Landlord, and derivatively, other tenants, has 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.

(v) One remedy that a Landlord can seek, and is often granted, is the right to terminate the Lease (often inaccurately called “recapture”) after some period of time. Here are two sample Lease provisions:

A. However, in the event Tenant ceases operations at the Premises for more than one hundred twenty (120) consecutive days for any reason other than repairs, remodeling or force majeure, Landlord may elect to terminate this Lease and recover possession of the Premises by giving Tenant thirty (30) days prior written notice of such election to terminate, and upon such termination, Tenant and Landlord shall have no continuing obligation to the other under this Lease.

—or—

B. If, after Tenant first opens for business for the one (1) day period as required above, Tenant (or any person or entity holding under Tenant) ceases to operate a retail store within at least fifty percent (50%) of the floor area of the Demised Premises, and that condition exists for a continuous period of more than three hundred sixty (360) days (not counting, for any purpose, those days when such operation is halted by reason of remodeling, fire or similar casualty, condemnation, government intervention, or reasons beyond Tenant’s reasonable control, and treating such days as they didn’t exist), then Landlord, as its sole remedy, may terminate this Lease on ninety (90) days’ notice to Tenant and this Lease shall so terminate on the ninetieth (90th) day if retail operations are not resumed within at least fifty percent (50%) of the floor area of the Demised Premises on or before the ninetieth (90th) day. If this Lease is so terminated, Minimum Rent and Additional Rent for the last month of Tenant’s occupancy shall be prorated and Landlord agrees to refund to Tenant any Minimum Rent and Additional Rent paid in advance, within thirty (30) days after such termination. Upon such termination, Landlord shall pay Tenant an amount equal to the Tenant’s unamortized book balance on account of Tenant’s real property improvements to the Demised Premises, if any. The unamortized portion of Tenant’s expenditures shall be determined by multiplying such expenditures by a fraction, the numerator of which shall be the number of years of the Term of this Lease which shall not have expired at the time of such recapture by Landlord (making the assumption that Tenant would have exercised at least one 5-year renewal option, if at least one remains) and the denominator of which shall be the number of years of the Term of this Lease which shall not have expired at the time Tenant’s expenditures were made (making the assumption that Tenant would have exercised at least one 5-year renewal option, if at least one remains).


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