Legal Memorandum: Violation of a Continuous Operation Covenant

Issue: Does a business violate an implied covenant of continuous operation when it breaks a lease?

Commercial leases may contain either express or implied covenants of continuous operation.  William L. Patton Jr. Family Ltd. Partnership LLLP v. Simon Prop., 370 F. Supp. 2d 846, 848-49 (E.D. Ark. 2005).  One court described the provision as follows:

A continuous operation clause is [a] . . . covenant requiring the tenant to operate its business in the leased premises continuously throughout the term of the lease. This lease provision is commonly used in commercial leases for retail space within shopping centers.  . . . Store closings, whether temporary or permanent, could affect several aspects of the operation of a shopping center such as the vacancy rate, tenant mix, customer draw, profitability, or the ability to relet the space. Through continuous operation clauses, landlords seek to assure themselves of rental income from tenants for long periods of time, and to ensure that their shopping centers will not have any vacant stores that detract from the overall view of economic prosperity that a fully-leased shopping center presents.

Id.  

At present most “courts will not imply a covenant or condition that a lessee of business premises will continue to operate the business.”  15 Williston on Contracts § 48:4 (4th ed. 2013 Supp.) (emphasis added).  There are other courts, of course, that will at least consider doing so.  Id.

Of the courts that will consider imposing an implied continuous operation obligation, most will base their determinations on the presence, or absence, of several key factors in the lease itself and in the surrounding […]