Beware the Continuous Operation Leasing Clause

Leasing requires more than just a good eye for location. Your professional duties require you to provide competent services. This means you must understand the legal implications of standard commercial lease terms and how these terms can make or break your client’s business.

The scenario

Your client, a hairdresser, has no money to operate her business. The popular coffee shop that generated a huge portion of her clientele shut down. She has no choice but to close her business, let her staff go and work out of her basement. Although she closed the business and turned off the lights at the retail location, she continues to pay rent. Everything was fine until she received a letter from the landlord’s lawyer telling her to reopen.

The letter threatened that if she didn’t reopen she would be in breach of the lease. This meant that she would be required to fork up the entire term’s rent increased by 50 per cent. The lawyer referred her to the Continuous Operation clause and the fact that she and her agent (you) signed the Offer to Lease that attached the lease terms.

She’ll lose money if she opens, but she’ll lose money if she doesn’t! Your client is now threatening to sue you for negligence.

What happened?

You didn’t see the Continuous Operation clause.

It is in the landlord’s interests to make sure its tenants are fully operating because this attracts people.

More people generate more customers. More customers drive up a tenant’s sales. And higher sales drive up the amount of rent owed to the landlord. High customer volume also attracts grade “A” tenants, a bonus for landlords looking to refinance. In order to make sure that these interests are protected, you may find a Continuous Operation or Conduct of Business clause stipulating the following:

""Tenant shall operate its business on all regular business days except legal holidays, at least eight (8) hours each day between 9 am and 10 pm. Tenant retains the right, in its discretion, to be open on Sundays or holidays [….]. Landlord has the right to terminate the Lease should Tenant at any time elect to discontinue the operation of its store and Tenant shall immediately pay to Landlord the Present Day value of all rent remaining due for the balance of the term increased by 50%.

This clause requires your client to always operate her store even if she is financially unable to do so. She also can’t “shut down” to go on holiday for three weeks. This is because she has to be open during regular business days. If she goes on holidays or shuts down, as she just did, the landlord not only has the right terminate the lease, but also to accelerate rent payments at a 50 per cent mark-up.

Canadian courts are unclear as to whether or not they’ll enforce a Continuous Operation clause.

Some judges have and others haven’t. So, don’t leave it up to chance to determine the fate of your client’s livelihood. You might find yourself in a lawsuit.

What should you do?

If you’re representing the tenant, strike out this clause completely. If that isn’t possible, request that the clause be modified so that the tenant can close its business, but will still be responsible for all rent, as per the terms of the lease. This is called a “Go Dark” clause and gives tenants the flexibility they need to run their business.

It is unlikely, however, that the landlord will grant the tenant a “Go Dark” clause without some restrictions. Be prepared for the landlord to request a recapture right that allows the landlord to take back the tenant’s space. The landlord may also restrict the tenant’s ability to open up a similar business nearby.

If a “Go Dark” clause is rejected, another approach that would protect your client is to add a “Co-Tenancy” clause to the lease.

Generally, “Co-Tenancy” clauses allow the tenant to stop operating its business or be entitled to reduced rent if another “key” tenant closes up its business. A properly drafted clause would have allowed your client to close her doors or get reduced rent, depending on the terms of the clause, as soon as the coffee shop closed.

The next time you’re negotiating a lease, think of these issues and make sure your client is protected.

To see a standard Commercial Lease agreements, visit our Small Business Law Library!

Written by Natalka. Natalka is an award winning graduate of Osgoode Hall Law School & Wilfred Laurier University who is deeply committed to increasing access to justice and improving the way the law is practised and delivered.