Tuesday, December 2, 2008

Can you say operating covenant?

In an office lease, a landlord often does not care if a tenant actually uses its space so long it pays the rent.

Retail? That is a while different ballgame. Nothing looks worse than a shopping center where the tenants have "gone dark," or closed the store while still paying rent. You have a myriad of issues related to this that go far beyond the scope of a blog. I'm sure there are some articles about this phenomenon out there.

I got a kick out of a Journal story yesterday about this. Some retailers are trying to get out of deals without having to pay hefty termination fees. In the case of Office Depot, they signed 40 new leases but do not intend to open all of the stores.

So why the title of the post? In retail leasing you usually try to get the tenant to agree to continuously operate a store. This is a hard concession to extract from many national retailers, who often want the flexibility of going dark while keeping the lease to assign to another party or to reopen a store when times are better or in another concept.

Big boxes can even be tougher. One thing I did recently when confronted with this situation is to get the national retailer to open a full-service, fully-staffed store for at least one day. This at least mitigates as much as possible the Office Depot situation. And it worked, the eocnomy notwithstanding. I don't know what OD's landlords did that lets them not even open, but in this market, maybe collecting rent is better than nothing.

(H/T Traffic Court.)