Many commercial leases include an operating covenant or continuing operations clause pursuant to which the Tenant promises to continue operating its business through the term of the lease. This clause is intended to protect the Landlord’s interest in future sales and to prevent unexpected and unsightly vacancies which negatively affect neighboring tenants and thus the overall profitability of the premises.
These continuing operations clauses, although beneficial for the landlord, place a substantial financial burden on the tenant. Tenants typically cease operations because their business is operating at a loss, so forcing a tenant to continue running its money-losing business imposes what seems like an unsustainable obligation.
Last Year, a King County Superior Court judge was asked by Bellevue Square, LLC to force Whole Foods Market, Inc. (“Whole Foods”) to continue to operate its “365 Whole Foods” store under the parties’ 20-year lease. The trial court judge granted Bellevue Square’s motion for a preliminary injunction and forced Whole Foods to reopen and continue operating the store. Whole Foods moved for an immediate appeal of this decision, and this month the Washington Court of Appeals overturned the trial court’s decision.
For years, Bellevue Square was anchored by three large tenants: Nordstrom, Macy’s, and JCPenney. In 2014, JCPenney planned to cease operations and vacate its space. In 2015, Bellevue Square entered a lease with Whole Foods which required Whole Foods to pay a certain portion of its profits to Bellevue Square and to continue operations during certain hours for the first 10 years. The store opened in September 2016 and it was closed a year later.
Bellevue Square provided expert testimony that Whole Foods, by vacating the premises, “disrupted the stability of the shopping center, affected negotiations with potential and current tenants, reduced customer traffic, prevented Bellevue Square from recovering percentage rent, and impacted Bellevue Square’s reputation.” Whole Foods argued that once it vacated, there were other remedies available to Bellevue Square under the lease, and that the lease did not allow for specific performance in this context.
Ultimately the Court of Appeals agreed with Whole Foods, finding that the remedies available to Bellevue Square under the lease where the tenant ceased operations were specific and limited. The Court of Appeals further held that these limited remedies did not include forcing the tenant to reopen, that the landlord had a duty to mitigate its damages by finding a new tenant, and further that the damages claimed by Bellevue Square were consequential damages which were disclaimed under the lease.
Based on this recent decision, if a landlord wants the option to force its tenant to continue operations, the landlord needs to expressly identify that remedy in the lease, clearly state that the remedy applies in the event the tenant vacates the premises, and address the same in the consequential damages section of the lease. With that said, a savvy tenant should not agree to such a punitive remedy.
If you would like more information on commercial landlord-tenant rights and obligations please contact shareholder Katie Comstock.
The full Court of Appeal’s decision can be found here: http://www.courts.wa.gov/opinions/pdf/777700.PDF