The return of Keep Open Clauses

Posted: 23rd March 2018

The continuing turmoil on the High Street has inevitably made retailers look closely at their store portfolios and in particular their non-profitable outlets.

For those of you old enough, Keep Open Clauses were legally considered some time ago and ever since, us Surveyors have ignored such clauses in English leases as being in-material and thus have not deemed them worthy of consideration in valuation, let alone considered them as actually able to prevent a Tenant closing a shop.

This feeling sits comfortably with the fact that the English courts would be unlikely to enforce the clause, except where it can be proven that the store closing is an Anchor store or a significant tenant that would detrimentally affect the rest of the development/high street.

The original purpose of the keep-open clause is straightforward: landlords of a shopping centre want to have all of their units occupied and open for business in order to maintain both the profile of the centre and its investment value. This is of course is even more essential for a Landlord, where the rents are partly based on turnover.

Closed shops in a shopping centre can have a negative effect for ALL – Landlords and Tenant’s alike  – as they make a centre or a certain pitch of a centre less desirable to shoppers, which can impact on the turnover and profitability of the trading units – which in turn affects the level of rent and hence the investment value of the shopping centre.

Despite this shared desire to keep shops open for the benefit of ALL, where a Tenant is struggling financially and assuming the unit isn’t deemed an Anchor, then the Tenant generally closes the unit, despite the protestations of a Landlord, and minimises the Tenant’s ongoing losses

To date, this position in England, irrespective of clauses within a lease to the contrary, is rarely challenged within the Courts – who will not enforce the keep open obligation by way of specific performance, except in exceptional circumstances.

English law takes the view that damages are an adequate remedy for a breach of contract (including breach of a lease), but landlords often find it difficult to substantiate a capital loss unless the tenant is an Anchor tenant. The reason for this difficulty is that it has not to date been easy to accurately ascertain how loss of footfall can be valued – could this be changing with ever improving data collection and analysis?

In the leading case in this area from 1997, the House of Lords was asked to grant an order for specific performance, which forces the tenant (in this instance the Safeway supermarket chain) to re-open and trade a unit they had closed. However, the Court’s ruling established the opposite principle – namely, that it would not be appropriate for the English courts to grant an order for specific performance that would oblige a tenant to stay open and trade.

Will a changing retail environment create a changing Court attitude?

Today’s environment is different and a multi-channel retailer, will consider profitability in differing ways – take Starbucks over in the US who recently restructured their property portfolio and looked to close a 379 store sub-chain of theirs, including 77 branches held by one Landlord.

The big differential here is that Starbucks was deemed PROFITABLE and seen to be restructuring not struggling with debt. The closures were thus halted in the US courts after action by a Shopping centre owner who contended their centre would be irreparably damaged by the closures, if Starbucks were allowed to breach the Keep open clauses within their leases and they sought an injunction – a Judge ruled in the Landlords favour!

A similar example but this time an Anchor situation in the US, but the retailer Whole Foods who had closed a store will little or no notice within a shopping centre in Washington have been forced to re-open by the Courts.

The moral of the story here is that modern retailers must now,  more than ever be aware of new legal risks should they choose to restructure their property portfolios, breaching previous defunct keep open clauses in a situation where the retailer is actually profitable

Ashley Miller comments: “I am not suggesting that US decisions have jurisdiction in the UK but as the multi-channel retail environment continues to change, the restructuring of a profitable retail business, may give rise to new legal challenges by affected landlords who are facing enough bad news through the financial collapse of retailers and who faced with closures from profitable retailers, may try to hit back!”