Oct 18, 2013 9:55:00 AM

Going Dark: Lease Terms Every Retail Tenant Should Know

By Don Catalano

Connect

 One of the most valuable lease termslease terms that you can negotiate is the "go dark" clause. Go dark clauses give you the opportunity to vacate an unprofitable space. Together with a co-tenancy clause, they can give you the ability to not just shut down an unprofitable operation but also get out of paying rent for the location.


Go-Dark Clauses

Most leases require you to continuously operate your business while you are leasing space in the property and if you violate your center's hours of operation or close down completely, you could end up in default. A go-dark clause gives you the opportunity to shut down your operation without sanction from the landlord as long as you continue paying your rent.

 

Landlords frequently oppose granting go-dark clauses because they can lead to rolling vacancies as tenants move out to avoid being in a center with gradually shrinking traffic. One of the lease terms that a landlord may offer you instead is a go-dim clause that requires you to modify the way you operate or your operation hours to reduce your costs.

 

Another option that your lease may contain is a recapture clause. Recapture lease terms let your landlord take your space back and cancel your lease obligations if you go dark. While this can be valuable if you want to get out of the space, it also means that going dark could make you lose your space once and for all if the landlord recaptures it.

Co-Tenancy Clauses

Co-tenancy clauses take the go-dark clause one step further. They allow you to not just cease operations but also to reduce or completely abate your rent. They're triggered when specified vacancies occur in the center. Frequently used in anchored centers to allow in-line tenants to vacate if an anchor goes dark, the co-tenancy clause can protect you against being in a center that doesn't have the promised level of traffic.

 

Co-tenancy clauses come in three types:

  • Pre-leasing co-tenancy clauses allow you to cancel a commitment to lease space if other businesses haven't also signed leases by a set date.

  • Opening date co-tenancy clauses allow you to cancel your leases if your co-tenants haven't opened their stores by a set date.

  • Occupancy co-tenancy clauses get triggered when a specific tenant moves out or if a center's occupancy falls below a threshold.

 

Once you open your location, the co-tenancy clause either lets you move out and effectively cancel your lease or significantly reduces your rent, usually to a pre-set percentage of your sales at the location. These lease terms can also vary by how they get triggered. Named co-tenancy clauses list specific tenants that have to move out to trigger the provision while occupancy threshold clauses simply refer to a flat occupancy percentage, regardless of how it is achieved.

Co-tenancy clauses are extremely valuable when the space you occupy deteriorates in traffic.


Should I Stay Or Should I Go?

Just because your business has go-dark or co-tenancy lease terms doesn't mean that they should be used. Going dark can disrupt relationships with existing customers, running the risk of sending them to your competitors.

 

Canceling your lease under a co-tenancy clause or having it taken from you through a recapture provision means that you lose all of your rights to your space. While this might not seem like a problem if a center is dying, you could end up regretting the loss if the center is revitalized by new tenants and becomes a place that you'd like to occupy. As such, using go-dark and co-tenancy clauses is actually a nuanced strategic decision. 

A tenant rep can help you every step of the way, make you sure have one on your side.

 

Other great Retail articles:

Retail Site Selection Tips

The Importance of Good Co-Tenants in Retail

Going Green in Retail Commercial Real Estate

What is Tenant Representation?

 

Subscribe to our blog for other great articles!!
Subscribe Now

 

Topics: Lease Terms

Office Space Calculator Use Now
10 Steps to Cutting  Your CRE Expenses Download
Improve EBITDA by Cutting Your RE Costs Download

Comment

Don Catalano

Connect