.png)
A retail tenant who is current on rent but has closed their doors is, from a pure lease-compliance standpoint, doing nothing wrong if the lease does not require them to operate. They are meeting their contractual obligations exactly as written. The landlord, meanwhile, is watching foot traffic decline, co-tenancy thresholds erode, and the property's income trajectory move in a direction that base rent alone cannot reverse. This is the operating covenant gap, and it is one of the more consequential silences in a retail lease.
The problem is not obscure, and any landlord-side leasing attorney working in retail will tell you that the absence of a continuous operation obligation is one of the first things they look for when reviewing a lease. It is also one of the provisions most commonly absent from leases that were drafted without landlord-specific representation, because it requires the drafting attorney to anticipate a scenario that does not look like a default, one where the tenant is paying rent, the landlord is collecting it, and the asset is still being damaged.
A dark store is a leased retail space where the tenant has gone dark, meaning they have ceased operations, pulled inventory, and shuttered the storefront, while continuing to pay rent under the lease. The phenomenon became widely visible during the retail consolidation wave of the last decade, when national chains used dark stores strategically to control market territory, satisfy lease obligations without operating costs, and prevent competitors from accessing the space.
For a landlord, the base rent continuing to arrive masks the real economic damage for a period of time, which is part of what makes dark store risk difficult to price without working through the specific lease mechanics, and the actual cost shows up in several places simultaneously.
Foot traffic in retail centers is not additive in a simple linear way. Anchor tenants and strong inline operators generate cross-shopping that benefits every tenant in the center. When a meaningful tenant goes dark, the foot traffic effect ripples across the property in ways that are difficult to isolate but straightforward to observe: remaining tenants see lower sales volumes, co-tenancy thresholds in their leases may be approached or breached, and the landlord's ability to attract replacement tenants or negotiate strong terms on renewals weakens in proportion to the center's declining performance metrics.
In retail leases that include a percentage rent structure, the tenant pays base rent plus a percentage of gross sales above a stated breakpoint. The percentage rent component is designed to give the landlord participation in the tenant's revenue upside and to align the tenant's economic incentives with the property's performance.
A dark store eliminates that participation entirely. Gross sales at a closed location are zero, which means the percentage rent contribution goes to zero regardless of how the breakpoint was structured or how the tenant's other locations are performing. Where percentage rent is a meaningful component of the income structure, its disappearance affects both current cash flow and the NOI figure that a buyer will use to price the asset.
The more significant issue, from a valuation standpoint, is what the dark store signals to prospective buyers about the income stream's stability. A buyer underwriting a retail property with one or more dark stores is not simply discounting a vacant unit. They are pricing the risk that the lease structure permits the pattern to continue or expand, and that the landlord has limited remedies to compel re-opening. If the lease is silent on continuous operation, that risk assessment is well-founded.
Co-tenancy provisions in retail leases give tenants the right to pay reduced rent, and in some cases to terminate the lease, when anchor tenants vacate or when a specified percentage of the center's gross leasable area falls below an occupancy threshold. Whether a dark store triggers a co-tenancy clause depends entirely on how the clause defines its triggering condition, and a lease that ties co-tenancy to vacancy rather than to active operation may not be triggered by a tenant who remains in possession but has ceased operating, which is itself a drafting point that compounds the operating covenant gap. These provisions are negotiated by tenants precisely because they understand that their sales performance is partly a function of who else is operating in the center.
A landlord whose lease portfolio contains co-tenancy provisions but no operating covenants is sitting on a compounding exposure. If a major tenant goes dark without triggering a lease default, and the dark store causes co-tenancy thresholds in other leases to be breached, the landlord faces reduced rent from multiple tenants simultaneously. The event that started it, the anchor going dark, was not a default under the anchor's lease but simply the exercise of a right the lease inadvertently created by failing to require continued operation.
The connection between the operating covenant gap and co-tenancy exposure is one of the analytical threads that landlord-side lease counsel works through when reviewing a retail lease portfolio. The two provisions interact, and the risk they create together is more significant than either creates in isolation.
A well-drafted continuous operation covenant requires the tenant to operate its business in the leased premises, open to the public, during agreed-upon hours, throughout the lease term. The provision typically specifies minimum operating hours, defines what constitutes continuous operation for the tenant's business type, and establishes the landlord's remedies if the obligation is breached.
The drafting details matter considerably, and each gap in the provision enables a specific category of damage. An operating covenant that applies only to the initial term and not to renewal periods leaves the landlord exposed during the portion of the tenancy when the tenant has the most economic leverage and the least reputational risk in going dark, because a tenant approaching a renewal decision who wants to pressure the landlord on terms can cease operations, watch foot traffic decline, and create conditions that weaken the landlord's negotiating position, all without triggering a breach. A provision that defines a breach narrowly, requiring complete closure rather than addressing materially reduced operations, may not capture the range of scenarios that damage the property, since a tenant who operates on reduced hours with minimal inventory and no meaningful customer draw is producing the same foot traffic effect as a dark store while technically remaining open. And a covenant without meaningful remedies, including the right to recapture the space or collect damages measured against the economic harm to the property, provides less protection than its presence in the lease suggests.
Sophisticated tenants and their counsel negotiate hard against operating covenants, and they negotiate the exceptions even harder. Force majeure carve-outs, permitted renovation closures, and temporary suspension rights all require careful drafting to ensure they do not swallow the substantive obligation. Getting the provision right requires understanding both what tenants will accept in the DFW market and what level of protection actually protects the asset.
Operating covenants are not a novel concept. They have been a standard subject of negotiation in retail leasing for decades, and any attorney with significant landlord-side retail experience will include them as a matter of course. The question of why they are so frequently absent from leases in the market comes down to who is drafting and reviewing the lease and what scenarios that attorney has been trained to anticipate.
A generalist real estate attorney, or an attorney whose practice is not specifically organized around representing commercial landlords, approaches a lease review by looking for provisions that are facially unfavorable: above-market rent abatement, excessive TI allowances, unfavorable renewal options, problematic assignment rights. These are visible, quantifiable, and relatively straightforward to identify from the tenant's draft.
The operating covenant gap is a different kind of problem. It requires the attorney to look at what is not in the lease and to reason through a scenario where the tenant is performing under the lease by every conventional metric, paying rent, maintaining the space, complying with use restrictions, while still causing economic damage to the property. That is not a scenario that surfaces from reading the tenant's draft closely. It requires a frame of reference built from representing landlords specifically, across enough retail transactions to have seen what a dark store actually does to a center's income trajectory and what it costs a landlord when the lease provides no remedy.
Landlord-side specialist counsel brings that frame of reference to the negotiation. The operating covenant is one of the first provisions they look for, and when it is absent from the tenant's draft, one of the first provisions they insist on including.
When a retail lease is silent on continuous operation, the landlord is not dealing with a minor drafting gap but with a provision that gives the tenant a unilateral right to damage the property's income trajectory, foot traffic, co-tenancy performance, and exit valuation without triggering any default, all while remaining current on base rent. The landlord will not know the full cost of that silence until the tenant decides to exercise the right the lease inadvertently created.
The operating covenant is drafted once, at lease execution, in the negotiation between the landlord's attorney and the tenant's attorney. Whether it ends up in the lease, and whether it ends up with enough substance to actually protect the asset, depends on who is sitting on the landlord's side of that negotiation.