Continuous Operation Clause in Retail Leases

A continuous operation clause in retail leases obligates the tenant to remain open for business during specified hours, usually requiring regular operating days and minimum staffing. Landlords use it to protect their percentage rent streams and to ensure a shopping center stays vibrant and draws customers. The clause is common in leases with percentage-rent components, particularly in malls and anchored centers, but enforcement is contentious and hinges on how the clause defines “operating,” what counts as an excuse, and whether the landlord can prove breach.

Why Landlords Insist on Continuous Operation

In percentage-rent leases, the landlord’s rent is a blend of base rent (fixed) and a percentage of the tenant’s gross sales (variable). When a tenant stops operating, that percentage-rent stream vanishes, hitting the landlord’s cash flow and potentially the net operating income of the building.

A single dark storefront also signals decline to other tenants and customers. A shopping center with one closed shop loses foot traffic; that ripple can suppress sales at neighboring tenants, further eroding both the landlord’s percentage rent and the property’s overall vitality.

Continuous operation clauses are therefore standard in:

• Shopping malls, where a major anchor or key inline tenant’s closure can cripple traffic patterns
• Anchored centers where tenants on percentage rent are essential to the center’s mix
• Urban retail, where a closed storefront invites vandalism and degrades the street
• Specialty centers (auto, dining) where each tenant’s operation is part of the leasing promise

Typical Language and Obligations

A minimal continuous operation clause reads something like:

“Tenant shall continuously operate the premises during all hours of business customarily maintained by tenants in similar retail properties in the market, no fewer than [X] days per year and [Y] hours per day.”

More aggressive versions specify:

• Exact days (e.g., Monday–Sunday, 10am–9pm)
• Minimum staffing (e.g., “adequately staffed at all times”)
• Type of operation (e.g., “retail sales use only; no warehousing or office use”)
• Exclusions (e.g., insurance required; utilities available)

The language is often vague on purpose. Landlords want flexibility to argue breach; tenants want wiggle room to argue they were operating even during off-peak.

Excuses and Force Majeure

Most leases carve out narrow exceptions:

• Casualty loss. If fire or flood closes the store, continuous operation is excused (usually for a stated time, then the tenant must restore or terminate).
• Utility failure. If the landlord fails to provide heat, electricity, or water, the tenant is excused.
• Pandemic or government order. Leases written pre-2020 rarely covered this; COVID forced amendments or litigation. Modern leases increasingly add “government-mandated closure” as a force majeure exception.
• Labor strikes. Some leases excuse strikes; others do not.

What they rarely excuse:

• Slow sales or financial hardship
• Inventory shortage
• Change in brand strategy
• Staffing turnover or illness

A tenant cannot invoke hardship and simply close without breaching.

The Enforcement and Proof Problem

Proving breach is harder than it sounds.

What counts as “operating”? Is a store with one employee “adequately staffed”? If the tenant is there eight hours on weekdays but closes Sundays, and the lease says “customary hours,” does that breach—or is Sunday closure customary for that retail type? Does holding a “going out of business” sale for six months count as operating?

How does the landlord know? Shopping a tenant’s location once does not prove they are always closed. A landlord might hire a mystery shopper or security guard to monitor; the tenant might argue sampling error or claim the observer came during a brief (permitted) absence.

What is the remedy? Leases often claim the right to terminate if the tenant materially breaches continuous operation. But courts require proof the breach was both clear and uncured. A tenant who reopens two days after a closure notice might argue no material breach, especially if the closure was brief.

Tension Between Percentage Rent and Operating Costs

For the tenant, continuous operation becomes a trap if sales plummet. A store that cannot cover payroll, utilities, and accounts payable is still required to open daily. The landlord collects percentage rent on whatever sales do occur; the tenant absorbs the loss.

This asymmetry is why many tenants push back:

• Add a sales threshold. “Tenant may cease operation if sales fall below $X per month for Y consecutive months.”
• Cap operating hours. “Tenant shall operate [specific hours]; hours may be reduced to [reduced hours] if sales fall below $Y.”
• Casualty/condemnation excuses. “Continuous operation is excused if the premises are damaged and cannot be repaired within 60 days.”
• Termination for economic hardship. “If net operating profit is negative for two consecutive quarters, tenant may terminate with 90 days’ notice.”

Sophisticated tenants negotiate these carveouts; mom-and-pop retailers often sign standard forms and find themselves stuck.

Percentage Rent and the Operating Clause Connection

The continuous operation clause is a direct defense of percentage rent. Consider the arithmetic:

• Base rent: $10,000/month
• Percentage rent: 5% of gross sales above $250,000/year

If the tenant operates normally and posts $3 million in annual sales, percentage rent is 5% of $2.75 million = $137,500/year ≈ $11,458/month, boosting total rent to $21,458/month.

If the tenant closes and pays only base rent, the landlord loses $11,458/month. Over a year, that is $137,500—a material hit.

Without a continuous operation clause, the tenant could extract concessions (“I’ll pay reduced percentage rent if you let me close Sundays”) or simply walk away. The clause forces the tenant to stay committed.

Modern Pressures and Gaps

E-commerce and omnichannel. Retailers increasingly operate warehouses, fulfillment centers, or pop-up formats. A tenant might argue that a small-format presence satisfies “operating” even though it generates less foot traffic. Leases written in 1995 did not anticipate this.

Pandemic amendments. COVID forced landlords and tenants to renegotiate. Some leases now excuse government-mandated closure; others now say “remote operation counts.” Still others were terminated outright.

Retail consolidation. When a national chain files bankruptcy, it often rejects leases and closes stores. Landlords are left holding the bag. Some now require letters of credit or personal guarantees from the tenant’s owner to collateralize operating-clause breaches.

Litigation Patterns

Courts have held:

• A landlord cannot unilaterally waive the continuous operation clause as a pretext to collect percentage rent on zero sales.
• A brief, inadvertent closure (hours, not days) is usually not material breach unless the lease is hyper-specific about hours.
• If the lease defines “customary operating hours” by reference to market norms, the tenant has some discretion; if the lease specifies exact hours, the tenant must adhere.
• The tenant’s financial hardship is irrelevant if the clause does not explicitly excuse it.

Remedies typically include lease termination (rare, because the landlord then has a vacant space) or a setoff against percentage rent owed.

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