What is a keep open or continuous trading clause?
A keep open clause requires a tenant continuously to occupy and trade from its premises throughout the duration of the lease. In the absence of such an express lease obligation, the tenant could shut-up shop and cease trading - although he would still have to continue to fulfil his other obligations under the Lease, such as paying rent and keeping the property in good order and repair and heated to a degree that would prevent damage e.g. by frost or decay.
Generally such clauses tend to appear in leases of retail property, rather than offices or industrial units.
Why landlords want them but tenants don't
Landlords are keen to avoid having unoccupied properties as they are more difficult to market, their condition is likely to deteriorate more quickly and neighbouring properties will also be less attractive to both customers and prospective tenants. The concern is much greater for multi-occupancy investments such as shopping centres or retail parks, rather than single occupancy properties such as a shop in a tenement building. In a multi-occupancy property, the closure of a major or anchor tenant in the centre inevitably leads to fewer customers walking through the centre to look at other shops. Even the closure of a few small units can prejudice the value of a landlord's investment.
It's not all upside for a landlord. The presence of a keep open clause can reduce the open market rent achievable at rent review - if there is a review and if that review is to open market rent.
Tenants have different concerns. In the boom years, tenants rarely wanted to cease trading - as their trade paid the rent. However, during (and since) the economic downturn, more and more tenants have been looking for ways to cut costs. Shutting a shop allows a tenant to save on staff wages and the costs of fully heating and lighting their premises and also local authority business rates (for a period).
If the Court finds a breach, there are three remedies available to a Landlord of Scottish property:
Interdict: If a Tenant has not yet ceased to trade from the premises, but the landlord is concerned that the tenant is about to cease trading, then a Scottish court might grant an order prohibiting the tenant from ceasing to occupy or trade from the property.
Specific Implement: If there is a genuine risk that the tenant is about to cease trading, or it has already ceased trading, then a Scottish court might award decree of specific implement ie requiring the tenant to stay open or to re-open and continue trading from the premises.
Damages: If a tenant has ceased to trade, the Landlord could recover damages for its loss, which could include:
- reduction in the capital value of its investment; and
- possible rent which would have been payable by tenants of vacant units in the remainder of the building,
to the extent that the drop in value and the inability of the Landlord to let vacant units can be attributed to the tenant ceasing to trade from its unit.
General approach of Scottish and English courts
The position of the Scottish and English courts towards available remedies for a breach of a keep open clause differs.
Scottish Courts treat specific implement (the English equivalent being specific performance) as the primary remedy. Landlords raising actions in Scotland tend therefore to try for that and only default to the remedy of damages if specific implement is not appropriate e.g if the tenant is clearly heading towards insolvency, then a court might be reluctant to grant an order that could be impossible to enforce.
In contrast, English law only allows the remedy of specific performance in exceptional cases - and so the normal remedy in England or Wales for the breach of a keep open clause is damages. The difficulty with that is then proving the extent of the landlord's loss.
Scottish courts only allow interdict or specific implement if wording is sufficiently precise
The Scottish courts will only grant an interdict prohibiting the tenant from ceasing to trade or an order of specific implement if the wording of the keep open clause is sufficiently precise so that tenant can be taken to know what is required of it to comply with the obligation.
Clauses that specify, in some detail, the nature of the trade (including the type of goods sold) and the hours of opening are more likely to be capable of satisfying the requirements of an order for specific implement than those that are more vague. There are a number of cases on the issue so that the principle is now fairly well established.
When considering what, if any, remedy to grant, the courts will also take into account the commercial realities which form the background to the situation e.g. whether the tenants are a large commercial organisation and entered the lease with full legal advice. Also, the courts will compare the loss to the landlord should the tenant succeed in the breach against the loss to the tenant if forced to remain in the property.
If you would like to discuss these issues further, please contact us.