June 4, 2018

Recent Court Rulings Demonstrate Value of Operating Covenants

Hartman Simons’ Katherine Silverman Discuss Recent Court Rulings and How They Demonstrate Value of Operating Covenants

By Katherine Silverman


Recent court rulings serve as a reminder of the importance and power of operating covenants — and the need for retailers to fully understand them before they close shop for good.

Many retail leases contain operating covenants included in a long list of boilerplate provisions.

Tenants agree to operate their stores for a minimum number of years during the lease term, but also agree to how many hours they will keep their doors open each week—usually conforming to the normal business hours for other tenants in the shopping center.

These provisions have not typically been heavily negotiated, and retail landlords have not had much success in enforcing them. When a tenant announces that they are closing their doors, the landlord’s best option tends to be a negotiated termination deal.

Disagreements over operating covenants don’t often find their way into court, and when they do, judges generally have avoided using the hammer of injunctive relief. But in two recent cases involving high-profile retailers, courts have granted preliminary injunctions against the retailers—leading some to wonder whether this will give retail landlords more legal muscle in future disputes.

In both cases, the retailers—Starbucks and Whole Foods—were ordered to resume or continue operations after they announced they were closing their stores.

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