The economic troubles of recent years have inevitably made retailers look closely at their store portfolio and in particular their non-contributing outlets. It's on reaching the decision to close loss-making stores that keep-open clauses in the lease can become an issue.
A 'keep-open clause' is the name commonly given to the obligation often seen in retail leases for a tenant to trade continuously throughout the duration of the lease. However, it's important to note the significantly different stance taken by the Scottish and English courts to such clauses and their enforceability.
Background to keep-open clauses
The purpose of a keep-open clause in a retail lease is straightforward: landlords in a shopping centre want to have all of their units occupied and open for business in order to maintain both the profile of the centre and its investment value. A keep-open clause is also essential for a landlord where the rent is based on turnover.
Non-trading units can have the effect of making a centre less desirable to shoppers, which can impact on the turnover and profitability of the trading units - which in turn affects the rents and therefore investment value of the shopping centre.
It's not all one way, however. Tenants will benefit from a centre that is vibrant and attracting customers. Therefore, often landlords' and tenants' interests are aligned, both agreeing in principle on the benefit of keep-open clauses.
However, where a tenant is struggling financially, or if the particular unit is not commercially viable, this can create a tension between the landlord and the tenant, whose positions are now at opposite ends of the spectrum - with the landlord insisting on the unit being kept open and the tenant looking to minimise their ongoing losses, or effect a disposal.
The position in England
Where a tenant under a lease containing a keep-open clause in England wishes to stop trading and move out of the unit, they can generally do so - unless they are an anchor or other significant tenant. That is because the English courts will not enforce the keep open obligation by way of specific performance, except in exceptional circumstances. English law takes the view that damages are an adequate remedy for breach of contract (including breach of a lease), and landlords often find it difficult to substantiate a capital loss unless the tenant is an anchor tenant.
A complication with this position is that it is not possible to accurately ascertain damages in most cases. For example, how is loss of footfall to be valued, and how are other tenants to be compensated for their losses? In the leading case in this area from 1997, the House of Lords was asked to grant an order for specific performance, which forces the tenant (in this instance the Safeway supermarket chain) to re-open and trade a unit they had closed. However, the Court's ruling established the opposite principle - namely, that it would not be appropriate for the English courts to grant an order for specific performance that would oblige a tenant to stay open and trade.
The position in Scotland
Problems may arise for tenants in Scotland because landlords are able to enforce a keep-open clause by obtaining an order for specific implement (the Scottish equivalent of specific performance), obliging the tenant to continue trading.
The most significant Scottish case in recent years was Highland & Universal Properties Limited v Safeway Properties Limited in 2000, again involving Safeway as anchor tenants in a shopping centre. The Court was asked to follow the principle set out in Argyll Stores in England. However, despite the case being almost identical, the court took the opposite view and Safeway were this time ordered to continue trading by an order of specific implement of their keep-open obligations.
The general trend in the Scottish courts has been that, as long as the obligations on the tenant are clear enough for the court to be able to make an order from which the tenant will be able to ascertain exactly how he must comply, the courts will grant an order for specific implement. That's not to say that the courts in Scotland will never grant damages if a landlord were to seek those or was opposed to specific implement. Further, as was demonstrated in the case of Douglas Shelf Seven Limited v Co-operative Wholesale Society Limited and Kwik Save Group plc in 2007, the Scottish courts are willing to go to some length to ascertain the amount of damages to be awarded on the breach of a keep open clause if necessary.
Conclusion
It must therefore be borne in mind that in Scotland, provided the keep-open clause is drafted clearly enough, the courts will enforce it. In England it is equally clear that in most cases the courts will not enforce such clauses, no matter how clearly drafted they are, despite the inequitable results in certain cases. Tenants with retail units in Scotland should be aware that Scottish courts will deal very differently with the enforcement of keep-open obligations than their counterparts in England, and this issue should be carefully considered when lease terms are being agreed. Expert advice can also ensure tenants have the necessary flexibility to close for periods required for operational reasons, such as shopfitting and/or disposal.
Equally, if a lease has already been entered into and you are looking to close or potentially dispose of the unit, early advice is essential so that a view can be formed not only as to the enforceability of any keep-open clause, but also the obligations of the tenant under the lease.
Contributor
Legal Director
