Continuous Operations Clause: Everything You Need to Know
A continuous operations clause provides tenants with the right to continue certain operations under specific circumstances.3 min read
2. Continuous Operations Clause in Shopping Center Leases
3. Lease Terminology: Operating Covenants
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.
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
- 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.
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.
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