Retail Hours of Operation: A Tenant's Perspective

In a retail setting, especially in situations where the landlord is receiving a percentage of the gross sales earned by the tenant, landlords will attempt to establish minimum (and maximum) hours of operation for the tenant. Also, the landlords quite often reserve the right to modify these hours of operation upon providing notice to the tenant. This requirement that the tenant be obligated to be open for business for certain specified hours may have far-reaching effects on the net income of the tenant derived from its business operation. Further, the tenant may desire to have the right to 'go dark' or not operate during certain times or days during the year. As a result, a tenant should consider carefully what impact the hours of operation provision in the lease has, the various remedies that are available to the landlord for the tenant's failure to operate during those required hours of operation, and the need for the tenant to establish in the lease certain times and certain days during the year when it is not obligated to be open for business.

Hours of Operation Requirement

As landlords attempt to maximize the amount of percentage rent generated at retail locations, they have increasingly sought to maximize the total number of hours that the tenant is obligated to operate at the retail facility. In particular, during the 'holiday season' (which seems to be getting longer and longer each year), landlords are attempting to require tenants to open for business very early in the morning (sometimes as early as 5:00 a.m.) and to remain open for business far later than the standard hours of operation during the rest of the year. While the tenant may want to maximize its gross sales, it usually does a cost-benefit analysis to determine whether it wants to be obligated to be open for business during those extended days and hours. For instance, a jewelry store will most often not derive its business until late morning or afternoon on each day. As a result, being obligated to be open for business at 5:00 a.m. does little to achieve or to maximize gross sales for the jewelry tenant. Further, the employees of a jewelry tenant are often well compensated and as a result, there is a tremendous amount of lost expenses by way of wages to the employees, if the tenant is obligated to open for business at 5:00 a.m. Further, there are a maximum number of hours that each employee can be required to work each week and if you lengthen the work day, it often requires the jewelry tenant to hire more employees in order to satisfy the hours of operation being required by the landlord. In addition, there is a security concern for some tenants ' for example, a jewelry tenant ' that are forced to operate late into the evening (especially if other tenants in close proximity to the jewelry tenant are not open for business). Similarly, retail operations that cater to children (e.g., amusement centers, comic book stores, hand-held motorized vehicle racing facilities, etc.) often have virtually no customers until after school hours. As a result, lengthening the workday in the early hours of the morning does little to achieve additional gross sales for those tenants.

Tenants should be very careful to craft provisions in their lease agreements that will establish certain hours of the day before which (and after which) they will not be obligated to operate. For instance, a restaurant tenant that serves primarily breakfast and lunch fare may not want to operate beyond 6:00 p.m. (However, this tenant may not have any issue with opening earlier for business, and may want to reserve the right to open for business before the remainder of the retail facility has opened for business.) A simple provision should be sufficient to protect the tenant's rights regarding hours of operation:

In a retail setting, especially in situations where the landlord is receiving a percentage of the gross sales earned by the tenant, landlords will attempt to establish minimum (and maximum) hours of operation for the tenant. Also, the landlords quite often reserve the right to modify these hours of operation upon providing notice to the tenant. This requirement that the tenant be obligated to be open for business for certain specified hours may have far-reaching effects on the net income of the tenant derived from its business operation. Further, the tenant may desire to have the right to 'go dark' or not operate during certain times or days during the year. As a result, a tenant should consider carefully what impact the hours of operation provision in the lease has, the various remedies that are available to the landlord for the tenant's failure to operate during those required hours of operation, and the need for the tenant to establish in the lease certain times and certain days during the year when it is not obligated to be open for business.

Hours of Operation Requirement

As landlords attempt to maximize the amount of percentage rent generated at retail locations, they have increasingly sought to maximize the total number of hours that the tenant is obligated to operate at the retail facility. In particular, during the 'holiday season' (which seems to be getting longer and longer each year), landlords are attempting to require tenants to open for business very early in the morning (sometimes as early as 5:00 a.m.) and to remain open for business far later than the standard hours of operation during the rest of the year. While the tenant may want to maximize its gross sales, it usually does a cost-benefit analysis to determine whether it wants to be obligated to be open for business during those extended days and hours. For instance, a jewelry store will most often not derive its business until late morning or afternoon on each day. As a result, being obligated to be open for business at 5:00 a.m. does little to achieve or to maximize gross sales for the jewelry tenant. Further, the employees of a jewelry tenant are often well compensated and as a result, there is a tremendous amount of lost expenses by way of wages to the employees, if the tenant is obligated to open for business at 5:00 a.m. Further, there are a maximum number of hours that each employee can be required to work each week and if you lengthen the work day, it often requires the jewelry tenant to hire more employees in order to satisfy the hours of operation being required by the landlord. In addition, there is a security concern for some tenants ' for example, a jewelry tenant ' that are forced to operate late into the evening (especially if other tenants in close proximity to the jewelry tenant are not open for business). Similarly, retail operations that cater to children (e.g., amusement centers, comic book stores, hand-held motorized vehicle racing facilities, etc.) often have virtually no customers until after school hours. As a result, lengthening the workday in the early hours of the morning does little to achieve additional gross sales for those tenants.

Tenants should be very careful to craft provisions in their lease agreements that will establish certain hours of the day before which (and after which) they will not be obligated to operate. For instance, a restaurant tenant that serves primarily breakfast and lunch fare may not want to operate beyond 6:00 p.m. (However, this tenant may not have any issue with opening earlier for business, and may want to reserve the right to open for business before the remainder of the retail facility has opened for business.) A simple provision should be sufficient to protect the tenant's rights regarding hours of operation:

Tenant shall not be obligated to open for business earlier than 10:00 am on any day of the year, nor be obligated to operate for business after 6:00 pm on any day of the year; however, Tenant reserves the right to open for business one (1) hour prior to the standard hours of operation for the retail facility.

A tenant may also want to establish a time by which the retail facility as a whole must be open for business, especially when its business is impacted by early morning sales.

While this concept may seem unnecessary, a national tenant with numerous stores across the country, which is forced to operate its business when virtually no additional gross sales are being earned, can cause a tremendous drain on the overall income derived by that tenant during the year, due to the increase in operating expenses, including labor expenses.

Remedies for Failure to Operate

Most leases will contain several remedies available to the landlords in the event a tenant fails to operate its business during the hours required under its lease agreement. The following list sets forth potential remedies that may be available to landlords. However, it is an illustrative, not exhaustive, list of the potential remedies that landlords may seek to impose:

• Increasing the base amount of rent owed during the period of closure;
• Placing the tenant in default of the lease with the right to terminate the lease;
• Imputing additional gross sales earned by the tenant during the period of time that the tenant is not open for business based upon gross sales earned by the tenant on an hourly basis during the year in question; and
• Removing certain rights that the tenant would otherwise have under the lease (e.g., the co-tenancy provisions, an exclusive right, a termination right based upon the failure to achieve a certain gross sales threshold, etc.).

Through the implementation of the aforesaid remedies, landlords will seek to enforce vigorously the obligation of the tenant to operate during all hours that the landlord dictates. While tenants may question whether the landlords would actually impose the penalties contained in their lease agreements in order to cause the tenant to operate for business, it should be noted that several national landlords over the past few years have actually served notices of default and have imposed penalties upon tenants within their retail facilities that failed to maintain the required hours of operation. Many of the tenants that have received these default notices and penalties from landlords were actually national tenants or 'big box' tenants that had numerous lease agreements with the various landlords. As a result, the terms and provisions regarding the hours of operation should be taken very seriously by the tenants, when negotiating these provisions in their lease agreements.

Rights of the Tenant Not to Operate for Business

Certain tenants have specific requirements on certain days of the year that they not be obligated to operate. Sometimes these restrictions are placed upon the tenants by a franchisor. In other instances, the provisions are imposed by the tenant itself. For example, the tenant known as 'Chick-fil-A' refuses to operate its business on Sundays. The typical lease agreement would require tenants to operate on each day of the week, including Sundays. As a result, if the lease agreement does not specifically provide that the tenant is not obligated to operate on Sundays, a major corporate policy of the particular tenant could be violated. Always be certain that the hours of operation that are required by the landlord are specifically agreed to by the tenant. Further, in the event that there are any days of the year that the tenant is not able to operate, those days should also be specifically stated in the lease agreement.

In certain circumstances, a tenant may choose to 'go dark,' meaning it will not operate its business, during certain times of the year. Quite often, a tenant may still be willing to pay rent during the times that it is not operating its business, but it simply wants to be able to close its doors for business. For instance, a tenant may want to take inventory on certain days of the year and not open for business, even though it will agree to pay rent on those days that it is closed for purposes of taking inventory. In addition, a tenant may want to be closed for business on certain days of the year like New Year's Day or Christmas Day. While it may seem that all retail facilities are closed on those holidays, as landlord-imposed mandatory hours of operation continue to increase, these days may cease to be times when the tenant is not obligated to operate its business. Therefore, in order to ensure that the tenant will never be required to operate on days of the year on which it chooses not to operate, those days should also be specifically drafted into the lease agreement.

Conclusion

By carefully drafting the hours of operation in a lease agreement, a tenant can prevent very costly situations where a tenant is obligated to operate during hours of the day that it will not achieve sufficient gross sales to warrant being open for business. Also, if a tenant fails to protect its hours of operation requirement carefully in the lease agreement, the tenant could suffer significant penalties, as well as risk termination of its lease, based upon default of the tenant's operating obligations under the lease.