Jennifer Guy: Landlords – enforcing a tenant’s keep open clause

With high street trading continuing to falter, the question of whether a landlord can oblige a tenant to continue trading has once again come back into focus. Here, Jennifer Guy reviews what a keep open clause is, the potential remedies of a breach available to a landlord and the points to consider when drafting such a clause.

Keep-open clauses

The common law position requires tenants in Scotland to enter into possession and then use and occupy the leased premises. They are obliged only to occupy the property, not to actively trade and carry on business from the premises.

This obligation to occupy is generally reinforced in a lease. However, leases, particularly those relating to retail parks or shopping centres, may contain additional provisions which compel a tenant to also carry on business there for the purpose specified in their lease. It is this obligation to carry on business which has become known as the “Keep-Open Clause”.

Why have a keep-open clause?

In the absence of a keep-open obligation, a tenant could close their shop and cease trading. Although the tenant must continue to fulfil their other obligations, such as paying rent and complying with repair obligations, a closed unit will have ramifications for the landlord and other occupiers of adjoining and neighbouring properties.

A landlord, rightly, wants to avoid having unoccupied properties for several reasons: they can be more difficult to market; their condition is likely to deteriorate more quickly; and, neighbouring properties will become less attractive to both customers and prospective tenants. Additionally, the closure of an anchor tenant can be nothing short of disastrous for both the landlord and for smaller tenants who rely on customer footfall to the centre which is driven by visits to a bigger named anchor tenant. Keep-open clauses are therefore not only for the benefit of a landlord but also for other tenants in a retail park or shopping centre.

But what, if anything, can a landlord do if a tenant is threatening to, or has gone ahead and closed its premises?

Remedies available to a landlord

There are three remedies available to a landlord if a tenant is in breach of a keep-open provision:

Interdict: if the tenant is still trading from the premises but the landlord has a legitimate concern that they intend to cease trading, the landlord can ask the Scottish courts to grant an order prohibiting the tenant from ceasing to trade from the property; Specific Implement (Scots law)/ Specific Performance (English law): in instances where is there a genuine risk that the tenant will cease, or has already ceased, trading, a Scottish court might be minded to award a decree of specific implement which requires the tenant to continue trading from the premises. The English law equivalent is a decree of specific performance; Damages: if a tenant has ceased to trade, a landlord can try to recover damages for its loss which could include a reduction in the capital value of its investment and/or possible rent which would have been payable by tenants of vacant units in the remainder of the centre, to the extent that the drop in value and the inability of the landlord to let the units can be attributed to the tenant ceasing to trade.

Keep-open clauses in Scotland and England

The approach of the Scottish and English courts towards available remedies for a breach of a keep-open clause differs somewhat.

English Courts

In England, the courts will rarely enforce keep open clauses by way of specific performance; the primary remedy for breach of a keep-open clause is damages. This approach of enforcing keep-open clauses, was established by the House of Lords in the leading 1997 case of Co-operative Insurance Society Ltd v. Argyll Stores (Holdings) Ltd.

The difficulty with this approach, however, is proving the extent of the landlord’s loss when awarding damages – how is loss of footfall to be valued and how will other tenants be compensated for their losses?

Scottish Courts

Scottish courts take a different view – a landlord is able to enforce a keep-open clause by obtaining an order for specific implement, which would oblige a tenant to continue trading. While the remedy of specific performance / implement is only granted in exceptional circumstances in England, the Scottish courts will only use their discretion to refuse such an order in exceptional circumstances. Exceptional circumstances are those instances where it is inconvenient and unjust, or if it would cause exceptional hardship to grant specific implement.

The most significant Scottish case involved Safeway: Highland & Universal Properties Limited v Safeway Properties Limited. Despite this case being almost identical to the 1997 English case, the Scottish court took the opposite view and Safeway was ordered to continue trading and this is the position that has been followed since.

There is one caveat: a Scottish court will only grant a decree for specific implement and enforce keep-open clauses if the obligations contained in the lease 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. It is therefore imperative that a keep-open clause be drafted with sufficient detail.

The detail of a keep-open clause

Clauses specifying both the nature of the trade and the hours of opening are more likely to be capable of satisfying an order for specific implement than those that are more vague; a decree of specific implement will not be granted in general terms to keep the premises in use and occupation without reference to the permitted purpose in the lease.

Why? The reasons are twofold: firstly, it is because the tenant’s positive contractual obligation is defined by the lease terms, which include the use clause, and, secondly, because an order which omitted use and occupation would lack the necessary precision and clarity.

This may pose a dilemma for a landlord – if they avoid detailed use clauses they exert less rigid control over the tenant’s use of the property. Equally, if the clause is too detailed it, at best, may have repercussions at rent review, depreciating the value of the lease, or at worst, be unenforceable. Wording such as “high class retail use” has been deemed sufficient by the courts.

In addition to adequate reference to use, a keep open clause must also refer to the hours of opening. In the 2004 case, Co-operative Insurance Society Ltd v Halfords Ltd (No 2), the court was prepared to grant an order of specific implement, however, the lease made no mention of the business hours during which the tenants were to operate, nor of the necessary reciprocal obligation on the landlord to keep the centre open.

The court therefore, did not grant the order on the basis that it did not feel able to import the hours of trading into the contract. “Normal hours of business” as well as more specific times such as “between the hours of 9am and 5pm each day” are sufficiently precise.

Conclusion

As with many things relating to leases in Scotland, the answer will lie in the terms of the lease itself. A landlord seeking a decree of specific implement must check their lease for the essential ingredients. It’s therefore advisable to take legal advice when drafting and negotiating a keep-open clause and also to seek advice as early as possible if it appears that your tenant intends to cease trading.

Jennifer Guy is an associate at Brodies LLP