Continuous-Operations Clause Law and Legal Definition

Continuous operations clause is provision in a lease.

When used in a oil-and-gas lease, it gives the lessee the right to continue any drilling well that was begun before the lease expired and to begin drilling more wells. Such clauses give the lessee reasonable time to fully develop the leased premises, after which the lessee should release that portion of the leased premises not necessary for the production of the wells it has drilled.

Under Kansas law, in the absence of a continuous operations clause, there must be actual production within the primary period of an oil and gas lease, and without such production, the lease will expire by its own terms. However, a "continuous operation" clause extends the lease for so long as the lessee-operator exercises due diligence in equipping the well and getting it into production, which includes the marketing of the gas. [Sword v. Rains, 575 F.2d 810 (10th Cir. Kan. 1978)]

Continuous operations clause in the lease of a shopping center is a covenant requiring a tenant to operate its business in the leased premises continuously throughout the term of the lease. This lease provision is commonly used in commercial leases for retail space within shopping centers. Landlords have three goals for the operation of their property: 1. Collecting as much rent as the market will bear in a timely and full manner; 2. keeping the center healthy and its tenants happy and successful; and 3. obtaining as much financing as possible and keeping its lender satisfied. Store closings, whether temporary or permanent, could affect several aspects of the operation of a shopping center such as the vacancy rate, tenant mix, customer draw, profitability, or the ability to relet the space. Through continuous operation clauses, landlords seek to assure themselves of rental income from tenants for long periods of time, and to ensure that their shopping centers will not have any vacant stores that detract from the overall view of economic prosperity that a fully-leased shopping center presents.

Continuous operation clauses may be express or implied. An implied clause is not explicitly stated in the lease, but may be inferred from other terms of the lease, such as percentage rent provisions, sublet or assignment clauses, and hours of operation clauses. The courts have applied a number of tests in determining whether a continuous operations covenant will be implied. Among the factors the courts take into account are: (1) whether base rent is below market value, (2) whether percentage payments are substantial in relation to base rent, (3) whether the term of the lease is lengthy, (4) whether the tenant may sublet, (5) whether the tenant has rights to fixtures, and (6) whether the lease contains a noncompetitive provision. In general, the adequacy of rent has been the most influential factor.[Patton v. Simon Prop. Group, Inc., 370 F. Supp. 2d 846 (E.D. Ark. 2005)]