Going dark?

By: J. David Chapman/December 14, 2017

Many retail establishments are struggling in the United States. I have written before about this. There is disruption in some retail arenas due to consumer preference for online purchasing or simply an oversupply of product and services in others. Whatever the reason, there is a little-talked-about clause in most retail leases called “going dark.” Most real estate investors, landlords, and property owners appreciate the security of a national tenant. It has a positive effect on something we call tenant mix, which simply means other retailers leverage their opportunities from the traffic that a big-name national retailer brings to the center. It is also easier to estimate the traffic volume of a national tenant and the customer demographic, which in turn allows prediction of success of other retail operations.

Typically, these national tenants will close stores and continue to pay rent for the reminder of the contracted lease period, or negotiate a release agreed to by the property owner. Some may think that is fair as long as the company continues to pay rent and the real estate property owner gets paid. The problem is that many of the tenants in and around these properties made decisions to locate there precisely because of its proximity to the anchor store. The closing of that store puts these businesses at risk and therefore the future of the entire center in jeopardy.

Recently, Starbucks announced it was shuttering all 77 Teavana locations nationwide. Many of those stores were in malls owned by Simon Property Group. Simon had going-dark clauses in their leases preventing Teavana from going out of business and forcing them to continue to be open and operating during normal business hours for the remainder of their leases. Some of those leases will not expire for another 10 years. A judge in Indiana has ruled in Simon’s favor, upholding the lease. Likewise, Amazon-owned Whole Foods tried to bypass some of its contractual agreements by closing some 365-branded stores and has encountered the same judicial decision with a court in Washington, ordering them to carry on business without interruption for the remainder of their lease obligation. Obviously, a bankruptcy would allow the closing of stores; however, both brands above are owned by companies that are still financially stable and growing.

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).