A recent Court of Session decision provides a helpful example of how use clauses and keep open obligations in Scottish commercial leases interact.
In Sapphire 16 S.a r.l v Marks and Spencer plc, the Court decided that the tenant, M&S, had failed to comply with a court order enforcing the keep open obligation in its lease. We have already covered the decision in a previous article.
This article considers one particular aspect of the case: the interaction between the 'keep open' and 'use' clauses in the lease.
M&S's store in East Kilbride Shopping Centre was the subject of this litigation. As a result of the pandemic, M&S was required to close most of that store. It did not reopen the store fully when the restrictions were subsequently lifted.
The landlord obtained an interim order requiring M&S to reopen the whole of the premises, but the dispute continued as the landlord complained that M&S were not complying fully with the court order.
Prior to the introduction of Covid restrictions, around 30% of the sales floor space in the store was used for the sale of food (under M&S's 'Foodhall' concept). After the Court made its interim order, M&S decided to operate the premises as an 'outlet store' and closed the Foodhall altogether.
The landlord took issue with this decision. It said that the closure of the Foodhall was contrary to the Court's order that the whole of the premises be re-opened.
The question was whether M&S was obliged by the lease (and the Court's order) to keep offering food for sale as it had prior to Covid.
The use clause
The key to answering this lay in the use clause in the lease. This said that M&S was obliged to use the store as "a retail store and administrative offices, stockrooms and staffrooms, or otherwise…as a shop…".
Though the use clause was sufficiently wide to cover the operation of the Foodhall, it did not refer specifically to the sale of food or drink on the premises.
As the landlord ultimately conceded, the terms of the use clause meant that M&S was not obliged to keep the Foodhall open in order to meet its keep open obligation under the lease.
Provided that it was trading as a retail store or otherwise as a shop, M&S was entitled to decide which types of products it offered for sale. This included deciding that it no longer wished to sell food from the premises.
It did not matter that the Foodhall had formed a large part of the store's offering before Covid. The standard against which M&S's trading was to be judged was the permitted use in the lease rather than the way they had previously traded.
M&S did, however, have to make full use of the available sales space – if it was not selling food then the space had to be used for the sale of other products.
At a time when numerous factors, such as economic uncertainty and changing consumer habits, are causing tenants to revaluate where and how they trade, both landlords and tenants should be alive to the interaction between the permitted use under a lease and the tenant's keep open obligation. When negotiating the lease, landlords in particular need to ensure that the use clause reflects their expectations of exactly what use the property will be put to, given they may wish to enforce the keep open provisions down the line.