Have you ever walked by an empty storefront in a popular shopping center, mall, or retail operation and thought, “I can’t believe that space can’t get rented?” Well, it is possible that a lease is in place, but no one is operating in the space. The tenant may have simply “gone dark.”
A go dark provision is a tenant-driven term to a retail lease by which the tenant may elect to cease operations in its leased space, but continues to pay rent to landlord. Therefore, the net economic effect of the provision is that the tenant continues to pay money for a location that is not generating any income. It sounds like a poor business model, doesn’t it? However, there are a number of reasons why tenants covet this term in their retail leases.
Why Tenants Want a Go Dark Option
The ability to go dark gives tenants, particularly larger tenants with national operations, maximum flexibility when managing their broader business. Below are some examples of the flexibility provided by a go dark term:
1. Cut your loses. In the event the location in question is not profitable for a tenant, the tenant may find that merely paying rent (and not paying to stock inventory, not paying salary and benefits to employees, not paying to advertise the location, etc.) minimizes the loss attributable to an unprofitable store.
2. Block you competition. If a tenant is in a particularly attractive retail location, but internal issues prevent it from operating profitably, that tenant may want to lock down the space and development (possibly through an exclusive use clause) in order to keep a competitor from moving in. It is the same concept that keeps Tab soda on grocery market shelves: sure, nobody drinks it, but at least Pepsi isn’t getting that shelf space.
3. Temporary closure. Closing a store for a period of months would undoubtedly run afoul of most leases, leading to a default by tenant. Therefore, if a tenant requires a restructuring, rebranding, or other activity that would lead to closing the store for an extended period of time, but the tenant intends to reopen in the future, a go dark provision would preserve the time, cost, and advantage already utilized in obtaining the current space.
Why Landlords Dislike Go Dark Provisions
As stated above, go dark provisions are tenant-driven. You won’t find them in landlord lease forms, and most landlords are very hesitant to agree to a tenant’s right to go dark.
Below is a list of considerations and concerns a landlord should evaluate before agreeing to include a go dark clause in its lease:
1. Effect on the development. If the tenant in question is an anchor tenant, its operations are essential to the success of the development. Smaller tenants seek certain anchors when chosing their retail space. Therefore, if the anchor goes dark, other tenants might start complaining, and future tenants might be scared off.
2. Percentage rent. Landlords seek rent from their tenants in several forms. For successful tenants, percentage rent (calculated as a percentage of tenant’s profits) can be a significant source of landlord’s income from the property. Obviously, if the tenant ceases operations, percentage rent is no longer available from that tenant. Granted, if a tenant is doing well enough to pay percentage rent, it is unlikely to go dark.
3. Location of tenant. Tenants with higher visibility should be less attractive candidates for go dark provisions. A shopping center is not well served having vacant storefronts fronting major roadways. An interior tenant might not put such a black mark on the development by going dark.
4. Exclusivity. As mentioned above, a tenant’s decision to go dark, coupled with an exclusive use clause, could prevent landlord from offering a certain type of store to its customers.
5. Default avoidance. A tenant that becomes aware that it might default under the lease, for whatever reason, may choose to go dark as a means to prevent its default. Tenant’s election to go dark prevents landlord from exercising the full scope of remedies available to it in the event of a default.
As you can see there are a number of negatives to granting a go dark right to a tenant. Those negatives can amplify given the size and influence of the tenant in question.
If a tenant insists upon a go dark provision (and the landlord insists on leasing to the tenant), there are a number of options available to a landlord to protect itself from some of the above-mentioned risks.
1. Recapture. This is probably the most attractive and most commonly used landlord protection against a tenant’s decision to go dark. A recapture clause permits the landlord to terminate a lease in which the tenant has gone dark, with no default to either party. This is useful when the landlord identifies an alternate tenant for the space. Also, landlord can avoid tenant’s efforts to block competition, as tenant’s exclusive use provision ends upon recapture of the space.
2. Relocation. A relocation provision could allow a landlord to move a visible tenant that has gone dark to a less visible portion of the shopping center, thus reducing the effect of its closure.
3. Notice. Requiring the tenant to give advance written notice of its intent to go dark (say 90 days) allows the landlord time to react to the situation by looking for a replacement tenant or seeking to exercise another option under the lease. Also, requiring notice prevents tenant from going dark merely as a means to avoid default (unless such default is foreseeable months in advance).
4. One-time right. A tenant should not be able to go dark repeatedly, only to reopen later. The inconsistency created by repeated dark periods would likely impact landlord’s operations with other tenants and confuse patrons of the subject store. Thus, landlords should limit the right to go dark to a single occurrence available to tenant.
A go dark provision is a useful tool for large retail tenants to manage their multiple stores. However, landlords must be careful that tenant’s flexibility is limited so as not to adversely impact the development at large.