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Operating Covenant
Practical Law Glossary Item 8-508-3171 (Approx. 3 pages)
Glossary
Operating Covenant
In the context of retail leasing, a tenant's promise to its landlord to maintain its leased premises open and operational. The negotiating leverage of the parties in a particular transaction is an important factor in whether a retail lease includes an operating covenant.
A landlord may insist on an operating covenant when there is a percentage rent clause in the lease, since the landlord can:
- Maximize its revenue from the percentage rent clause by ensuring the tenant maintains its operations according to a set schedule.
- Protect itself against the violation of any co-tenancy clauses protecting other tenants at the shopping center.
A tenant, on the other hand, will try to delete the operating covenant from its lease, especially if it needs to maintain a certain amount of flexibility in its operations.
There are several ways the parties can compromise to create a modified operating covenant that is acceptable to both parties. A modified operating covenant may include that the tenant remains open and operational only:
- For the first few years of the lease term.
- Through the first day the tenant opens its premises for business.
For more information on operating covenants, see Practice Note, Retail Lease: Key Provisions: Operating Covenant.