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Does Your Lease Have an Operating Covenant?

By James T. Mayer and Carole Laude Pechi

A retail lease should include a covenant requiring a tenant to operate in the premises. The covenant needs to state clearly and unequivocally that a tenant will be required to operate in the premises for the term of the lease. The active and open operation of tenancies is the essence of retail and what ultimately makes for a successful shopping center. A clear operating covenant, or lack thereof, also facilitates the party's exit strategy from the lease, something which is often more important than the actual operation of the business in the premises.

Landlords can best serve their goal of maintaining operation of a tenancy not only by having a clear and unequivocal operating covenant in the lease, but by drafting other clauses in the lease with the mindset that these other clauses can and should reinforce the unequivocal nature of the operating covenant. With the proper use of these other clauses and a strong operating covenant, the landlord will obtain the best outcome in the event that the tenant desires to terminate the lease earlier than the last day of the term. Yet these clauses, even when standing on their own, can also serve the same function as an operating covenant. This article discusses a number of the clauses that reinforce the operating covenant or perform the same function independently in the lease.

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