Are You Trying to Imply Something?: Understanding the Various State Approaches to Implied Covenants of Continuous Operation in Commercial Leases

University of Arkansas at Little Rock Law Review Volume 31 Issue 3 Article 2 2009 Are You Trying to Imply Something?: Understanding the Various State Approaches to Implied Covenants of Continuous Operation in Commercial Leases Jerald Clifford McKinney II Follow this and additional works at: https://lawrepository.ualr.edu/lawreview Part of the Property Law and Real Estate Commons Recommended Citation Jerald Clifford McKinney II, Are You Trying to Imply Something?: Understanding the Various State Approaches to Implied Covenants of Continuous Operation in Commercial Leases, 31 U. ARK. LITTLE ROCK L. REV. 427 (2009). Available at: https://lawrepository.ualr.edu/lawreview/vol31/iss3/2 This Article is brought to you for free and open access by Bowen Law Repository: Scholarship & Archives. It has been accepted for inclusion in University of Arkansas at Little Rock Law Review by an authorized editor of Bowen Law Repository: Scholarship & Archives. For more information, please contact . ARE YOU TRYING TO IMPLY SOMETHING?: UNDERSTANDING THE VARIOUS STATE APPROACHES TO IMPLIED COVENANTS OF CONTINUOUS OPERATION IN COMMERCIAL LEASES JeraldClifford McKinney, II* I. INTRODUCTION This article is being written during tough economic times. In September and October 2008, the Dow Jones Industrial Average dropped a couple thousand points. When economic times are this dire, companies may begin to rethink strategies and may look at store closings as a way to save money. For instance, Circuit City considered closing at least 150 stores in an unsuccessful effort to avoid bankruptcy.' Many other retailers have either done the same or considered it. The same thing, however, can happen when the economy is good. Businesses may decide to abandon an existing store and relocate to a better location to follow shoppers or community trends. Businesses may also decide to leave a site that is simply unprofitable for whatever reason. In many of these cases, the relocating or closing business may be in a long-term lease for its current building. The business could decide to close-up shop and keep paying rent for the remainder of the term.' Alternatively, the business may try to find a sublessee or assignee to take over the space. Whichever option is chosen, however, businesses need to carefully consider the potential legal consequences. Many commercial leases address this situation by expressly requiring the tenant to remain open for business known as a "covenant of continuous operation."3 Alternatively, the lease may expressly permit the * Mr. McKinney practices real estate law at the Little Rock firm of Quattlebaum, Grooms, Tull & Burrow PLLC. He earned a Bachelor of Arts from Baylor University, a Master of Public Administration from the University of Arkansas, a Juris Doctor from the University of Arkansas and a Master of Laws from Southern Methodist University. Mr. McKinney is licensed to practice in Arkansas, Mississippi and Texas. Mr. McKinney is currently serving his third term as Chair of the Real Estate Law Section of the Arkansas Bar Association, and he is an editor and founder of the Arkansas Real Estate Review. Mr. McKinney also serves as an Adjunct Professor of Law at the UALR William H. Bowen School of Law where he teaches Real Estate Finance and Real Estate Transactions Skills. 1. Shopping Centers Today Week, International Council of Shopping Centers, Vol. 13, No. 42 (October 27,2008). 2. Of course, bankruptcy could change the analysis discussed in this article. 3. Covenants of continuous operation are sometimes referred to in the industry as "covenants against going dark." See generally Austin Hood, Continuous Operation 427 UALR LAW REVIEW [Vol. 31 tenant to cease operations at will so long as the tenant continues to pay rent through the end of the lease.4 Some commercial leases, however, do not address this situation. What happens then? Many states recognize an implied covenant of continuous operation that could force a tenant to keep its doors open even though there is no requirement to do so written in the four corners of the lease.' Arkansas has very limited case law on this issue; there is, however, a federal district court case addressing the concept of an implied covenant of continuous operation.6 This article will first discuss implied covenants generally, including the "Standard Factors" that many jurisdictions apply. 7 Next, the article will explore the sparse Arkansas case law currently available.8 This article will also examine how courts in other jurisdictions have addressed the issue.9 Finally, this article will make suggestions for approaches to implied covenants of continuous operation that could be utilized in Arkansas.' ° II. IMPLIED COVENANTS IN GENERAL As noted in the introduction, Arkansas has very little case law on implied covenants of continuous operation. There is some case law on implied covenants in general, and the law is decidedly against finding implied covenants." According to the Arkansas Supreme Court: An implied covenant is one that may be reasonably inferred from the whole agreement and the circumstances attending its execution. They are not favored by the law and can be justified only Clauses and Going Dark, 36 REAL PROP. PROB. & TR. J. 365, 367 (2001). 4. See id. at 370. 5. See, e.g., EMRO Mktg. Co. v. Plemmons, 855 F.2d 528 (8th Cir. 1988); Evans v. Grand Union Co., 759 F. Supp. 818 (M.D. Ga. 1990); First Am. Bank & Trust Co. v. Safeway Stores, Inc., 729 P.2d 938 (Ariz. Ct. App. 1986); Casa D'Angelo, Inc. v. A & R Realty Co., 553 N.E.2d 515 (Ind. Ct. App. 1990). 6. See William L. Patton Jr., Family Ltd. P'ship, LLLP v. Simon Prop. Group, Inc., 370 F. Supp.2d 846 (E.D. Ark. 2005); infra Part III.A. 7. See infra Part II. 8. See infra Part III. 9. See infra Part IV. 10. See infra Part V. 11. See generally William L. Patton, Jr. Family Ltd. P'ship, LLLP v. Simon Prop. Group, Inc., 370 F. Supp.2d 846, 848 (E.D. Ark. 2005); Blake v. Scott, 92 Ark. 46, 46, 121 S.W. 1054, 1055 (1909); State v. Real Estate Bank, 5 Ark. 595, 602, 1844 WL 443, at *5 (1844). 2009] IMPLIED COVENANTS 429 upon the ground of legal necessity arising from the terms of the contract and the circumstances attending its execution. 2 The Arkansas Supreme Court held that it is the "duty of the Court to construe a contract according to its unambiguous language without enlarging or extending its terms."' 3 Nevertheless, Arkansas courts will find implied covenants when necessary." Arkansas case law, however, does not provide a clear protocol for determining when to imply a covenant, but other states do. For example, California, and many other states, have adopted a general protocol that can be applied to evaluate a variety of implied contractual covenants known as the "Standard Factors" that provide the following: The rules which govern implied covenants have been summarized as follows: "(1) The implication must arise from the language used or it must be indispensible (...truncated)