MacRoberts Real Estate Law e-update 01/05/08

TO FLEE OR NOT TO FLEE? ASK YOURSELF SOME QUESTIONS

With the credit crunch biting into retailer confidence and consumer spending, might we expect to see more retailers looking to shut up shop in marginal locations? If proposing to do so other than at the expiry of a lease term, tenants would do well to give careful consideration to whether or not their lease gives the landlord options to insist that they keep the unit open and trading actively.

What is a keep open clause and why have one?
Keep open clauses are commonly found in leases of retail units in shopping centres and precincts. In a keep open clause the tenant undertakes to keep the premises open and to carry on business for the duration of the lease. Although at common law tenants are obliged to enter into possession of premises and thereafter to occupy and use the subjects, they are not obliged to actively trade from premises. It is not in the landlord’s interest, even if the tenant is continuing to pay rent, for the tenant to close the shop, as this creates “dead frontage”, which can lead to a decrease in footfall, especially if the tenant in question is a prominent trader. In turn, this can affect the investment value of the centre/precinct as a whole, and the ability of the landlord to let other units.

What happens if the tenant decides to cut its losses and shut up shop?
If there is a keep open clause in the lease, the tenant will be in breach of contract by ceasing to trade. This leaves the landlord with various possible options, namely to:

• sue for breach of contract and damages;
• irritate the lease and sue for damages; or
• seek to force the tenant to comply with the keep open provision.

The first two options are often unattractive to landlords because it can be difficult to prove loss and, depending upon market conditions, it may be difficult for the landlord to find a replacement tenant if the contract is rescinded. The fundamental issues (a void unit) is not, therefore, addressed.

Enforcement of keep open clauses
It is currently settled law in Scotland that specific implement is a competent remedy for enforcement of keep open clauses. If the landlord has advance notice that the tenant intends to vacate the premises, he may wish also to seek interim interdict to prevent the tenant from doing so. However, neither option is without potential hazard. In order to be enforceable by specific implement, a keep open clause must be drafted very clearly, allowing the court to formulate an order with which it is possible for the
tenant to comply. An order for implement may also be refused if to grant an order would result in serious injustice or hardship to the tenant. Although the fact that a tenant is making a loss is not, of itself, enough to establish serious hardship, in the current economic climate potential losses may be threatening to the survivorship of a business and the court may find it easier to exercise their discretion to refuse and order.

Commentary
The news is not necessarily all bad for retailers. Whether or not to seek to enforce a keep open clause is a matter for a landlord to review carefully on each occasion where enforcement is an option. For tenants facing serious difficulties if they continue trading, it may be cheaper to defend a court action than to continue trading, and it may be worth their while defending an action if the quality of the keep open provision makes the landlord's chances of enforcement marginal. If possible, a negotiated replacement of the tenant will be the best option for all concerned. Only where a replacement tenant is likely to be hard to find and the keep open provision is well drafted should a landlord give serious consideration to enforcement as the primary option. With things as they are, the mere threat of enforcement of a keep open provision may no longer carry the same bite as it does during periods of relative prosperity.

If you require any further assistance or information please contact Anne Fergusson on 0131 229 5046
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