Closing premises to save costs needs careful consideration in Scotland.
As long as economic conditions remain challenging, businesses will continue to review their property portfolio to identify savings. Such a review may include the closure of leased premises because, while a tenant will not avoid obligations to pay rent or to keep the property in repair, it may allow the business to save on wages and utility costs. For those considering closure, however, it is important to bear in mind that the approach to keep open obligations in Scotland is quite different to the approach taken in England and Wales.
Keep open clauses
Keep open clauses are generally, but not exclusively, found in leases of commercial or leisure premises. The precise obligation will be determined by the wording in the lease but usually requires the tenant to continuously occupy and trade from the premises for the entire term.
Landlords tend to incorporate keep open provisions in leases with key tenants – those that are likely to draw footfall or increase the prestige or vibrancy of the neighbourhood. Keep open provisions are also found in leases where rent is calculated by reference to turnover and where closure would have a direct impact on the landlord’s income.
The difference with keep open provisions arises from the approach to enforcing the obligation taken by the courts in the different parts of the UK.
There are three possible remedies for a landlord seeking to enforce a breach of a keep open obligation:
1. injunction/interdict, if the tenant has not yet ceased to trade from the premises but intends to do so;
2. specific performance/specific implement, if the tenant has ceased trading or is winding down operations; and
3. damages for any loss sustained by the landlord as a result of the tenant’s breach of the obligation.
The divergent approach
In England and Wales, the primary remedy for breach of a keep open obligation is damages. The leading authority is the case of Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1997] 1 EGLR 52. The House of Lords held that a keep open clause was not, other than in exceptional circumstances, specifically enforceable, since it was settled practice of the court not to make an order requiring a party to carry on business.
In Scotland, by contrast, parties to a contract are entitled to expect that the court will uphold the agreed bargain. As a consequence, the court will grant specific implement and/or interdict to require parties to comply with its terms, provided those terms are sufficiently clear – Highland & Universal Properties Ltd v Safeway Properties Ltd [2000] SLT 414. It is only in exceptional circumstances that the court will exercise its discretion to refuse specific implement or interdict. Simply trading at a loss, even if it appears that loss may continue, may not be sufficient to justify a refusal of specific implement – Oak Mall Greenock v McDonald’s Restaurants Ltd [2003] GWD 17-540 – unless the business is incapable of surviving the loss or the cost of re‑equipping and staffing the premises would place an intolerable burden on the tenant. Interim orders can also be applied for which require the tenant to comply with its obligations immediately and until the final decision in any case is reached.
Clear terms
For properties in Scotland, clarity of drafting is key. The Scottish courts will only grant an interdict or an order for specific implement if the wording of the keep open clause is sufficiently precise that the tenant can know what is required of it to comply with any order granted. Clauses which specify in some detail the nature of the trade and the hours of opening are more likely to be capable of satisfying the requirements of an order than a general unspecified obligation to keep open. Once granted, failure to comply with the terms of an order for specific implement or interdict may be held as a contempt of court, usually punishable by a fine.
The alternative remedy of damages is also available in Scotland but is encountered less frequently. That is primarily due to the difficulty in quantifying the impact on the landlord’s investment. In Douglas Shelf Seven Ltd v Cooperative Wholesale Society Ltd [2007] GWD 9-167, the anchor store was closed in breach of the keep open obligation. The tenant argued that factors beyond its control had caused the landlord’s loss, including the opening of competitor retail premises, the poor location of the premises, and general social and economic change. These arguments were successful in reducing the sum awarded. Another consideration for the landlord, if the tenant is struggling financially, is the prospect of any recovery.
So, while closure of leased premises in Scotland may still be an option for tenants looking to reduce their liabilities, any tenant would be well advised to seek appropriate legal advice before taking any decisions, and certainly before implementing those decisions. For landlords who are also struggling in the current climate, the Scottish courts may offer some relief and it may not be necessary to accept a tenant’s decision to close as the last word on the matter.
Fiona MacGregor is a counsel in dispute resolution and Jayne Macfarlane is a senior associate in real estate at Dentons
