Key Takeaways

  • A continuous operations clause ensures certain business or industrial activities continue without interruption, even during disruptions.
  • In oil-and-gas leases, it allows drilling operations to continue past the lease term as long as due diligence and operational standards are met.
  • In shopping center leases, it requires tenants to keep operating throughout the lease to protect rent income, tenant mix, and customer traffic.
  • Continuous operations provisions may be express or implied and are often influenced by rent adequacy, lease length, and related clauses.
  • Outside of leases, continuous operations also apply to manufacturing, warehousing, and service industries, ensuring uninterrupted production and fulfillment.
  • Benefits include steady revenue, operational efficiency, and customer satisfaction, but drawbacks can include higher costs and employee strain.

A continuous operations clause provides tenants with the right to continue certain operations under specific circumstances.

Continuous Operations Clause in Oil-and-Gas Leases

A continuous operations clause is a specific provision included in a property lease. Particularly found in oil-and-gas leases, a continuous operations clause gives tenants the right to continue the operation of drilling wells that began before the lease expiration date. This clause also allows tenants to start drilling new wells. This provides tenants with enough time to properly develop the land that they are leasing. Any portion of the land that is not necessary to the tenant's production of the wells they have drilled should then be released back to the property's owners.

According to state-specific laws in Kansas, if a continuous operations clause is not in place, there has to be actual production during the primary time period of an oil-and-gas lease. If this required production does not occur, the lease expires according to the terms outlined in the agreement. It is worth noting, however, that a continuous operations clause will extend the duration of the lease for as long as the tenant does their due diligence in terms of keeping their wells properly equipped and operational. This includes marketing efforts to sell any gas that is produced.

Broader Applications of Continuous Operations in Industry

While continuous operations clauses are common in resource extraction leases, the principle also applies in many other sectors where downtime can severely impact productivity and revenue. For example:

  • Manufacturing plants may implement continuous operations to run equipment 24/7, minimizing setup times and maximizing output.
  • Warehousing and distribution centers often operate around the clock to meet high customer demand, especially in e-commerce and seasonal industries.
  • Public utilities and infrastructure services maintain continuous operations to ensure essential services like water, electricity, and telecommunications remain uninterrupted.

These arrangements require careful planning, such as shift scheduling, preventive maintenance, and safety protocols, to keep operations sustainable without overburdening staff.

Continuous Operations Clause in Shopping Center Leases

In a shopping center scenario, a continuous operations clause acts as a covenant that requires tenants to continuously operate their business over the entire course of the lease. A clause of this nature is most commonly used in commercial lease applications, and specifically when leasing space for businesses inside of a shopping center. In these scenarios, a landlord will typically have three goals in mind when leasing out their property:

  • Collecting as much rent money as possible
  • Keeping the property in good shape and making sure tenants are successful and happy
  • Obtaining as much financial support as they can and making sure their investors are happy

When a store closes, permanently or temporarily, it can have an effect on a number of aspects of the property's operations, including:

  • Vacancy rates
  • The mix of tenants
  • The ability to draw in customers
  • Profitability
  • The ability to lease the space again

By using a continuous operations clause, a landlord is attempting to make sure they will continue to receive rental income from their tenants over a long period of time. In addition, they are ensuring that their property will not have vacancies that can lower the overall view of success that a fully-leased property can project.

A continuous operations clause may be either implied or express. Implied clauses are not explicitly contained in a lease. They may be inferred, however, by using other terms throughout the lease, such as:

  • Percentage rent provisions
  • Sublet clauses
  • Assignment clauses
  • Hours of operation clauses

The court system has applied multiple tests to determine whether a continuous operations clause can be implied. Some of the factors that courts will take into account are:

  • If the base rent is below current market values
  • If any percentage payments are substantial when compared to the base rent
  • The length of the lease term
  • Whether tenants are permitted to sublet
  • Whether the tenant has fixture rights
  • Whether the lease includes a non-competition clause

Generally speaking, rent adequacy is the most influential aspect that comes into play when making these decisions.

Advantages and Disadvantages of Continuous Operations Requirements

Advantages

  • Consistent revenue stream for landlords or property owners.
  • Stable customer traffic, benefiting surrounding businesses.
  • Investor confidence, as consistent operations project stability and reduce vacancy risk.

Disadvantages

  • Operational strain on tenants, especially small businesses, which may face higher staffing and utility costs.
  • Limited flexibility, as tenants may be unable to temporarily close for renovations, emergencies, or strategic reasons.
  • Risk of disputes, if the definition of “continuous operation” is vague or enforcement is inconsistent.

Balancing the landlord’s interest in continuous tenant presence with the tenant’s need for operational flexibility is critical for a fair lease agreement.

Lease Terminology: Operating Covenants

Operating covenants in a lease are essentially agreements that state a tenant is to operate their business continuously for a specific amount of time or for a certain number of hours every week. A covenant such as this will normally appear in a lease that contains a percentage rent clause, which is designed to make sure the tenant will generate maximum potential sales. Due to the fact that stores in settings such as this are largely economically interdependent, operating covenants are important to landlords as well as their tenants as a way to provide an optimal flow of customer traffic.

Anchor tenants normally fare quite differently than those that occupy in-line stores when it comes to negotiating these covenants. An anchor tenant, for example, will typically leverage their bargaining power and insist that they retain their rights to shut down when they deem it necessary to do so.

Drafting and Negotiating Continuous Operations Clauses

When drafting a continuous operations clause, clarity is essential to prevent disputes. Key elements to define include:

  1. Scope of Operations – Specify whether the clause applies to all business activities or only certain core functions.
  2. Operating Hours – Clearly set required days and hours of operation.
  3. Permitted Exceptions – Outline acceptable reasons for temporary closure, such as emergencies, renovations, or public holidays.
  4. Performance Standards – Indicate whether minimum staffing, inventory, or sales levels are required.
  5. Remedies for Breach – Define landlord remedies if the tenant fails to comply, such as increased rent, damages, or lease termination rights.

In negotiations, tenants may seek concessions like reduced hours during low-traffic periods or the ability to “go dark” under certain conditions. Landlords, meanwhile, may offer rent incentives to ensure compliance.

Frequently Asked Questions

  1. What is the main purpose of a continuous operations clause?
    It ensures uninterrupted business activity, protecting revenue streams, maintaining customer traffic, and supporting operational stability.
  2. Can a continuous operations clause be implied?
    Yes. Even if not expressly stated, courts may infer one based on related lease provisions like percentage rent clauses or operating hours.
  3. Are continuous operations clauses only used in leases?
    No. They also apply to manufacturing, logistics, and service industries where downtime can harm productivity and profitability.
  4. How can tenants negotiate more flexibility in a continuous operations clause?
    They can request exceptions for renovations, emergencies, or seasonal adjustments and seek reduced hours during slow periods.
  5. What happens if a tenant violates a continuous operations clause?
    Possible outcomes include rent increases, damages, or termination of the lease, depending on the terms of the agreement.

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