When Office Tenants Go Dark

That aside, the typical retail analysis with respect to a go-dark request will not apply to office tenants. While there may be fewer grounds on which to oppose or deny a request to go dark by an office tenant, there are legitimate concerns that need to be addressed.

1. Restrict to Office-Only Buildings

As noted above, if there are service tenants in the building whose profitability will be affected by a reduction in the number of occupants in the building, it will be very difficult to grant a go-dark request. Ironically, it will be easier to grant a small tenant the right to go dark than a larger tenant, but it is, of course, the larger tenant that the landlord will be more likely prepared to accommodate.

2. Ensure the Lender Does Not Object

Because the landlord's revenue stream will not be affected by the failure of the tenant to operate and thereby generate sales to pay percentage rent (because none is payable), it is unlikely the lender will object, but this should be included as a condition to the right to go dark in order to ensure that the landlord does not violate the terms of the mortgage.

3. Make Conditional on No Adverse Impact on
Landlord's Insurance

Whether the tenant vacating the building will impact on the landlord's insurance will, for the most part, depend upon on how much of the building is being vacated. If the building is being occupied by a single tenant, that tenant's decision to vacate the building will be viewed by the landlord's insurer as a material change in circumstances. As such, the landlord will be legally required to notify its insurer to this effect.

We can also anticipate that this will drastically increase the insurance premiums payable for this property. Therefore, as part of the analysis of whether to grant the go-dark right, the landlord must first confirm that the tenant is both responsible for any increase in the cost of the landlord's insurance, and that it has the financial ability to bear this cost.

Further, most leases prohibit the tenant from doing anything that will cause a cancellation or a threatened cancellation of the landlord's insurance. Unless the tenant in question is very small (in which case leaving the building will have no effect on the landlord's insurance), the right to go dark should be made subject to this provision of the lease.

4. Require Notice

A decision to go dark is not made in a spurious manner. It should not be an issue for the tenant to be required to give the landlord a significant amount of prior notice that it intends to vacate the premises and the date it intends to do so. The landlord requires this notice period for a number of reasons ' one of which is to advise the insurer that part of the building will be vacant.

5. Confirm That the Right To Go Dark Is Subject to Paying All Rent When Due

Not only should the right to go dark be subject to the tenant's not being in default at the time of the request, but it should also depend upon the tenant's continued compliance with all the lease terms.

6. Require Security

In an office lease, part of the security for the tenant's rent covenant is represented by the landlord's distress right; that is, its right to seize the tenant's assets and sell them for non-payment of rent. By permitting a tenant to vacate the premises and remove its assets, the landlord is forgoing this form of security. Depending upon the strength of the tenant's covenant, the landlord should require the tenant to post hard security (cash) with the landlord in lieu of its distress right.

7. Grant the Landlord a Right to Recapture Its Premises

In consideration for granting the go-dark right, the landlord should require the tenant to grant it the option to recapture the premises and terminate the lease without recourse at any time following the date the tenant vacates the premises. The tenant will, of course, require the landlord to release the tenant from any further obligation with respect to the lease arising after the termination date. It is, however, imperative that the landlord have the right to recapture the space in order to take advantage of any opportunity that may arise to re-let the premises at favorable rates.

In furtherance of this right, the landlord should also require the tenant to agree that the landlord and its authorized agents have the right to show the premises to prospective tenants after the tenant vacates. The tenant should not object, as it is clearly in both parties' interests that the premises be re-let. This right should, however, be clearly drafted to confirm that the right to recapture and terminate is at the landlord's sole discretion and without any obligation to do so. The purpose of the provision is not to require the landlord to terminate, but to give it the option to do so in the event that there is an opportunity to re-let the space on favorable terms.

Laurie Sanderson is a partner in Gowlings' Ottawa office and head of the firm's Real Estate National Practice Group. She represents a wide variety of both private and public sector landlords and tenants.

Most office leases require tenants to actively carry on business from their leased premises, and prohibit tenants from vacating or abandoning the premises. It is becoming increasingly common, however, for tenants to object to these provisions and to request the lease include a “go-dark” provision.

In a retail situation, it is clearly imperative that the lease includes a continuous use covenant. In an office situation, however, the situation is somewhat different. First, office leases do not typically include the payment of percentage rent. As such, the revenue stream is not dependent on ensuring that the tenant maximizes its sales potential.

Additionally, the commercial success of the other office tenants of an office building is not dependent on, or affected by, a fellow tenant ceasing to operate. The exception, of course, is the mixed-use building that includes tenants offering services to the other tenants of the building, such as a drycleaner, restaurant/cafeteria or photocopy business. For these service providers, the vacancy rate in the building will have a clear impact on their success and the consequent rental value of their premises.

That aside, the typical retail analysis with respect to a go-dark request will not apply to office tenants. While there may be fewer grounds on which to oppose or deny a request to go dark by an office tenant, there are legitimate concerns that need to be addressed.

1. Restrict to Office-Only Buildings

As noted above, if there are service tenants in the building whose profitability will be affected by a reduction in the number of occupants in the building, it will be very difficult to grant a go-dark request. Ironically, it will be easier to grant a small tenant the right to go dark than a larger tenant, but it is, of course, the larger tenant that the landlord will be more likely prepared to accommodate.

2. Ensure the Lender Does Not Object

Because the landlord's revenue stream will not be affected by the failure of the tenant to operate and thereby generate sales to pay percentage rent (because none is payable), it is unlikely the lender will object, but this should be included as a condition to the right to go dark in order to ensure that the landlord does not violate the terms of the mortgage.

3. Make Conditional on No Adverse Impact on
Landlord's Insurance

Whether the tenant vacating the building will impact on the landlord's insurance will, for the most part, depend upon on how much of the building is being vacated. If the building is being occupied by a single tenant, that tenant's decision to vacate the building will be viewed by the landlord's insurer as a material change in circumstances. As such, the landlord will be legally required to notify its insurer to this effect.

We can also anticipate that this will drastically increase the insurance premiums payable for this property. Therefore, as part of the analysis of whether to grant the go-dark right, the landlord must first confirm that the tenant is both responsible for any increase in the cost of the landlord's insurance, and that it has the financial ability to bear this cost.

Further, most leases prohibit the tenant from doing anything that will cause a cancellation or a threatened cancellation of the landlord's insurance. Unless the tenant in question is very small (in which case leaving the building will have no effect on the landlord's insurance), the right to go dark should be made subject to this provision of the lease.

4. Require Notice

A decision to go dark is not made in a spurious manner. It should not be an issue for the tenant to be required to give the landlord a significant amount of prior notice that it intends to vacate the premises and the date it intends to do so. The landlord requires this notice period for a number of reasons ' one of which is to advise the insurer that part of the building will be vacant.

5. Confirm That the Right To Go Dark Is Subject to Paying All Rent When Due

Not only should the right to go dark be subject to the tenant's not being in default at the time of the request, but it should also depend upon the tenant's continued compliance with all the lease terms.

6. Require Security

In an office lease, part of the security for the tenant's rent covenant is represented by the landlord's distress right; that is, its right to seize the tenant's assets and sell them for non-payment of rent. By permitting a tenant to vacate the premises and remove its assets, the landlord is forgoing this form of security. Depending upon the strength of the tenant's covenant, the landlord should require the tenant to post hard security (cash) with the landlord in lieu of its distress right.

7. Grant the Landlord a Right to Recapture Its Premises

In consideration for granting the go-dark right, the landlord should require the tenant to grant it the option to recapture the premises and terminate the lease without recourse at any time following the date the tenant vacates the premises. The tenant will, of course, require the landlord to release the tenant from any further obligation with respect to the lease arising after the termination date. It is, however, imperative that the landlord have the right to recapture the space in order to take advantage of any opportunity that may arise to re-let the premises at favorable rates.

In furtherance of this right, the landlord should also require the tenant to agree that the landlord and its authorized agents have the right to show the premises to prospective tenants after the tenant vacates. The tenant should not object, as it is clearly in both parties' interests that the premises be re-let. This right should, however, be clearly drafted to confirm that the right to recapture and terminate is at the landlord's sole discretion and without any obligation to do so. The purpose of the provision is not to require the landlord to terminate, but to give it the option to do so in the event that there is an opportunity to re-let the space on favorable terms.

Laurie Sanderson is a partner in Gowlings' Ottawa office and head of the firm's Real Estate National Practice Group. She represents a wide variety of both private and public sector landlords and tenants.