Many tenants in the retail sector are finding it increasingly difficult to meet the rising cost of carrying on business from shop premises. Increases in energy costs, high level business rates and commercial rents, as well as a decrease in customers, who are themselves finding the high cost of living is having an impact on their spending power, has led to many shop tenants evaluating the viability of their business and making decisions on how to reduce overheads. Following the Christmas sales period, many tenants might consider vacating their shop, perhaps for the short term, or possibly for the long term to cut costs to maintain the viability of their business or sadly in some cases to bring their business to an end.
Often a tenant’s decision to close their shop will coincide with the end of the lease, but what happens if a tenant ceases to trade from the premises during the term of the lease? In this scenario and in the absence of any provision in the lease to the contrary, the tenant will remain liable to comply with the tenant obligations in the lease until released from doing so. For example, the tenant will remain contractually obliged to pay the rent, service charge and any other money due under the lease.
What other obligations does a commercial tenant have besides rent payment?
In addition to payments due under the lease, there may be other obligations which the tenant should consider in their decision-making process. Whilst the lease continues, the tenant will remain liable for business rates where the lease imposes an obligation to do so on the tenant. The tenant may be entitled to apply to the local authority for empty property relief for a period of up to three months. However, before taking this step the tenant should check the terms of their lease. Most modern leases include a covenant by the tenant with the landlord not to apply for such relief so that the landlord may take advantage of any relief available should the landlord be left with empty premises.
In addition, the lease may include an obligation to reimburse the landlord any increase in the insurance premium for the premises if the premises are left vacant or to take certain steps required by the insurance company to ensure the premises are secure against, for example, damage by burst pipes, or occupation by squatters.
Where the lease includes a tenant repairing obligation the tenant will remain responsible for keeping the premises in repair until the lease comes to an end.
How do ‘keep open’ clauses work?
Further, the tenant may be subject to a positive obligation requiring the tenant to keep the premises open for trade during usual trading hours for the whole of the term of the lease. An obligation of this nature is often found in shopping centre leases. Its purpose is to protect the landlord against an adverse effect on the shopping centre in terms of an attractive shopping experience for shoppers. The loss of a key or anchor tenant may result in a reduction in footfall which could have a negative impact on rental levels and the desirability of other units in the centre to prospective tenants.
In theory, if the lease contains a keep open clause, depending on the wording of the clause where the tenant is in breach of its contractual obligation one of the remedies available to a landlord is to apply to the Court for specific performance requiring the tenant to comply with the covenant in question and to re-open the premises for trade. However, in practice following the decision in Cooperative Insurance Society Limited v Argyle Stores (Holdings) Limited the Court will only make an order for specific performance in very exceptional circumstances. The reasons given by the Court for refusing to grant specific performance include the oppressive nature of an order compelling a tenant to continue to trade and the potential for injustice where the loss to the tenant of continuing to trade is disproportionate to the loss suffered by the landlord.
Each case will be decided on its own facts and the wording of the particular clause, however generally, in England and Wales the landlords remedy for the tenant’s failure to comply with a keep open clause is damages. The position is different in Scotland. In Scotland the current approach taken by the Court is that a tenant should comply with its contractual obligations and in general specific performance will be granted.
Any tenant looking to reduce their overheads and who is considering as part of that process closing their premises should seek legal advice on their obligations under the lease and their exposure to a claim by the landlord for breach of covenant. There may be other options including a negotiated early surrender of the lease which could be more a cost-effective solution in the long run in terms of limiting a tenant’s exposure to future claims and uncertainty.
To find out more, please contact our real estate disputes team at email@example.com.