Commercial lease – Supermarket anchor store in shopping centre – Keep-open clause requiring defender to keep supermarket open for retail trade during usual business hours – Supermarket sublet – Subtenant closing supermarket – Whether defender still bound by keep-open clause – Whether losses of pursuer landlord too remote – Claim allowed
In 1994, the pursuer became the landlord of a shopping centre in Dundee upon taking an assignment of a ground lease for a term in excess of 125 years from 1969. The centre had been constructed in the 1960s as part of a local authority housing estate. Its various units were held by individual tenants on subleases. The defender was the tenant of the anchor unit under a sublease for a term of 63 years from 1970. A user clause specified that the premises were to be used as a supermarket. A keep-open clause obliged the defender to “keep the premises open for retail trade during the usual hours of business”.
The housing estate was in an area of social deprivation and, over the years the shopping centre had been subject to graffiti and vandalism. When the pursuer acquired the centre, a number of the units were empty. The supermarket premises were occupied under a subunderlease that had been granted by the defender in 1993, with the consent of the then landlord, for a term of 20 years to 2013. In 1994, another supermarket chain, K, acquired the business and assets of the subtenant and took over its stores. K took an assignment of the supermarket premises, with K’s parent, the third party, guaranteeing K’s obligations. In January 1995, K closed the supermarket.
The pursuer brought an action against the defender for breach of the keep-open clause. It claimed damages for a reduction in the capital value of the shopping centre and loss of rent and service charge income from the other units. The defender accepted that the keep-open clause was valid and enforceable, but argued that it did not oblige it to keep the premises open in circumstances where it had sublet with the landlord’s consent. The defender also denied any loss on the part of the pursuer, arguing, inter alia, that enlargement works carried out by the pursuer in 1998 had been commercially unreasonable and had broken the chain of causation. Moreover, since the pursuer had behaved unreasonably in carrying out the refurbishment, it had failed to mitigate its loss and had rendered the loss too remote to be recoverable. It also argued that factors other than the closure of the supermarket, such as competition and changes in local population and shopping habits over time, had been the true cause of the decline in the value of the centre. The defender claimed an indemnity from the third party in respect of any liability to the pursuer; the extent of the indemnity obligation was resolved by agreement between those two parties.
Held: The claim was allowed.
(1) The defender’s submission that the obligation to comply with the keep-open clause had been discharged upon the subletting was not consistent with its admission that the keep-open clause was valid and enforceable. Subject to any agreement to contrary effect, a subletting did not release the principal tenant from its obligations: Skene v Greenhill (1825) 5 S 26 and Britel Fund Trustees Ltd v Scottish & Southern Energy plc2002 SLT 223 considered. The lease bound the tenant to produce a result, whether by its own efforts or vicariously through a subtenant. A tenant’s obligation to enter into and retain possession of the premises did not require its personal occupation of them; vicarious performance of the obligation through occupation by a subtenant would suffice. A landlord’s consent to a subletting signified that vicarious performance by the subtenant would be acceptable, but did not release the principal tenant from its obligations. The obligation under the keep-open clause was to trade as a supermarket in a manner that was reasonable in all the circumstances, although it did not require the defender to trade as an anchor store or to adopt a specific trading format. On the evidence, a supermarket that operated in a reasonable manner would attract customers to the centre and create spin-off benefits for the other shops located there.
(2) The refurbishment and enlargement of the centre was not unreasonable. Its effect was to increase the value of the centre and significantly enhance the letting prospects. Although factors other than the defender’s breach of the keep-open clause had also affected the value of the centre, it was appropriate to deal with these under the rubric of remoteness rather than causation. Recovery was limited to loss of a type that the defender might reasonably have contemplated at the time of the contract: Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1996] 2 EGLR 93; [1996] 27 EG 125 and Jackson v Royal Bank of Scotland plc [2005] UKHL 3; [2005] 1 WLR 377 applied. When the sublease had been entered into, it had been envisaged that the premises would function as an anchor store, attracting customers to the centre as a whole and rendering the other units there attractive to tenants and therefore more valuable. That was the commercial rationale of a keep-open clause. Given that the sublease was for a term of 63 years, it must have been within the contemplation of the parties that major social and economic changes would take place over that period. Those changes would affect the trading and profitability of a supermarket operated at the premises. A reduction in the value of the centre as a whole, as a result of the closure of the supermarket, was within the reasonable contemplation of the defender as tenant of those premises, as was a loss of rents from vacant units and related losses, such as non-recovery of service charges. Although the scale of those losses would vary from time to time depending upon market conditions, it was the type of loss rather than its scale that was relevant to questions of remoteness. Applying that approach, the losses for which the pursuer sought to recover were not too remote. The closure of the supermarket had caused a substantial reduction in the capital value of the centre as well as revenue losses over the period since 1995.
(3) Damages fell to be assessed on the basis of a comparison between the capital value of the centre as it was and as it would have been had the keep-open clause been performed, together with accrued revenue losses. Since the capital value reflected the anticipated future revenue to be derived from the property, that head of damages would compensate the pursuer for all future revenue losses as well as the current diminution in the value of its asset. Where the defender had persistently failed to comply with its obligations over a period of more than 10 years, the comparison should be made as at the most recent date practicable, rather than as at the date of closure of the supermarket: Transworld Land Co v J Sainsbury plc [1990] 2 EGLR 255 applied. The sum of £450,000 would be awarded in respect of the diminution in value of the centre as a result of the defender’s breach of contract. Such sum was the difference between a valuation of £900,000, had the defender complied with its obligations, and the valuation of £450,000 given by a surveyor as at May 2005. The sum of £149,698 should be awarded for accrued revenue losses caused by the defender’s breach of contract.
Ian Abercrombie QC and Pino Di Emidio (instructed by McClure Naismith, of Glasgow) appeared for the pursuer; Andrew Renton, solicitor advocate (instructed by Dundas & Wilson, of Glasgow) appeared for the defender and the third party, Kwik Save Group plc.
Sally Dobson, barrister
