News

Safeway ruling turns the tide on keep-open clauses

News

Estates Gazette

24 May 1997

by Anita Howarth of EGi

Landlords will not be able to force shopping centre tenants to keep trading, as a result of a landmark judgment by the Law Lords.

The Lords overturned an appeal court decision against tenant Safeway, which had been forced to reopen its store in the Co-operative Insurance Society’s Hillsborough shopping centre in Sheffield. The ruling means that a landlord’s only remedy now for a breach of covenant is damages.

Previously, appeal judges had ruled that, because Safeway was an anchor store occupying 30% of space in the centre, “an award of damages would be unlikely to compensate the landlords fully”.

But Safeway argued that a tenant should be allowed to close an unprofitable store provided it was willing to pay damages to the landlord. At Hillsborough, the retailer argued that the store’s trading loss of £70,000 during 1994 justified its decision to close.

Closing the Hillsborough store formed part of Safeway’s strategy of disposing of 20 of its least profitable stores. All 20 stores were subject to the same keep-open clause.

The retailer’s adviser, Titmuss Sainer Dechert’s Steven Fogel, said: “Safeway is delighted with the judgment. What it does is to reinforce the established principle that a keep-open clause is not specifically enforceable.”

However, Safeway still feels that such clauses are onerous because a landlord can seek compensation through damages. It will continue to ask for a rent cut at review to cover this obligation.

John Pickstone, a partner at Clifford Chance, argued that landlords will still want to force retailers to keep trading: “If they give an anchor tenant substantial incentives to take a unit, they are going to want to try and reclaim some of that if the tenant decides to leave. The landlord will therefore try and make provision in the lease for the damages payable if the retailer decides to stop trading from the store.”

Cameron McKenna partner Mark Heighton said that if the appeal court decision had been upheld, it could have meant bankruptcy for some: “These clauses are more common in leases on smaller units.”

It has implications for fast-food operators as well. If McDonald’s decided to close an outlet it could have a major impact for the landlord in terms of people coming into the centre.”

Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [6] 1 EGLR 71; [1996] 09 EG 128.

by Anita Howarth of EGi Landlords will not be able to force shopping centre tenants to keep trading, as a result of a landmark judgment by the Law Lords. The Lords overturned an appeal court decision against tenant Safeway, which had been forced to reopen its store in the Co-operative Insurance Society’s Hillsborough shopping centre in Sheffield. The ruling means that a landlord’s only remedy now for a breach of covenant is damages. Previously, appeal judges had ruled that, because Safeway was an anchor store occupying 30% of space in the centre, “an award of damages would be unlikely to compensate the landlords fully”. But Safeway argued that a tenant should be allowed to close an unprofitable store provided it was willing to pay damages to the landlord. At Hillsborough, the retailer argued that the store’s trading loss of £70,000 during 1994 justified its decision to close. Closing the Hillsborough store formed part of Safeway’s strategy of disposing of 20 of its least profitable stores. All 20 stores were subject to the same keep-open clause. The retailer’s adviser, Titmuss Sainer Dechert’s Steven Fogel, said: “Safeway is delighted with the judgment. What it does is to reinforce the established principle that a keep-open clause is not specifically enforceable.” However, Safeway still feels that such clauses are onerous because a landlord can seek compensation through damages. It will continue to ask for a rent cut at review to cover this obligation. John Pickstone, a partner at Clifford Chance, argued that landlords will still want to force retailers to keep trading: “If they give an anchor tenant substantial incentives to take a unit, they are going to want to try and reclaim some of that if the tenant decides to leave. The landlord will therefore try and make provision in the lease for the damages payable if the retailer decides to stop trading from the store.” Cameron McKenna partner Mark Heighton said that if the appeal court decision had been upheld, it could have meant bankruptcy for some: “These clauses are more common in leases on smaller units.” It has implications for fast-food operators as well. If McDonald’s decided to close an outlet it could have a major impact for the landlord in terms of people coming into the centre.” Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [6] 1 EGLR 71; [1996] 09 EG 128.