On the face of it, breach of a “keep-open” covenant, because the tenant has shut up shop and is in liquidation, would appear to present a landlord with a cast iron case for forfeiture – especially if the tenant’s unit is one of the largest, and is centrally located, in the landlord’s shopping centre.
Key points
- Forfeiture clauses are designed to ensure compliance with leases, and are not to punish tenants
- Consequently, the court may grant relief from forfeiture if the tenant is able and willing to comply with the lease in the future
- If the tenant cannot comply, or cannot be trusted to do so, relief may be granted conditionally on a sale to an assignee who will comply
However, courts of equity take the view that forfeiture clauses are designed to ensure compliance with leases, and not to punish tenants. And, if forfeiture would confer a windfall on the landlord, and inflict a serious loss on the tenant, recent decisions suggest that the court will lean in favour of granting relief, if the court can be assured that the breach of covenant has been, or will be, rectified and that the tenant is able and willing to perform his covenants in the future.
Alternatively, if the tenant cannot comply with the lease itself, or cannot be trusted to do so, relief may be granted conditionally on a sale to an assignee.
Keep-open covenant
SHB Realisations Ltd & Anor v Cribbs Mall Nominee (1) Ltd & Anor [2019] EW Misc 11 (CC) concerned the lease of one of the largest units in the shopping centre known as Cribbs Causeway in Bristol.
The unit was let to British Home Stores (BHS) in 1998, for a term of 125 years at a peppercorn rent. BHS paid £7.05m plus VAT for the lease, granted a charge over the lease to secure substantial borrowing, and subsequently went into liquidation in 2016.
The lender continued to pay the service charge and other outgoings (which totalled £767,000 in 2018) while BHS, which had changed its name to SHB Realisations Ltd (SHB), tried to find a buyer. But, despite passing interest from several retailers, the unit remained empty. Consequently, the landlords forfeited the leasehold interest on the ground that SHB was in breach of a “keep-open” covenant in its lease.
Would the court grant SHB and its lender relief from forfeiture and give it six months to find an assignee? In Freifeld v West Kensington Court Ltd [2015] EWCA Civ 806; [2015] EGLR 60, the Court of Appeal had granted a highly unsatisfactory tenant relief from forfeiture of a lease that was worth more than £1m on condition that it sold the lease to an assignee within six months. But relief from forfeiture is a discretionary remedy and the court’s discretion is very wide.
Arguments
The landlords claimed that the breach of covenant was deliberate, wilful and incurable, and that they, and their tenants, would continue to suffer damage while a “sub-anchor” store in the shopping centre remained boarded up.
The lease had already been on the market for more than two years and there was no evidence of any serious interest in it. Furthermore, any potential assignee would be deterred by the terms of the lease because, in addition to the keep-open covenant, the lease contained a landlord’s break option, exercisable in 2023 and every 25 years later, and a pre-emption right, exercisable on any proposed assignment of the lease (in each case subject to the landlord paying open market value for the lease).
By contrast, having regained possession of the unit, the landlords would be better able to attract a vibrant new retailer to improve footfall for the benefit of its other tenants.
They could offer attractive new lease terms and – subject to reaching an agreement with the adjoining tenants – could adjust the size of the unit, or make physical improvements to the common parts around the premises, to make a letting more desirable.
The landlords also claimed that SHB and its lender lacked the “clean hands” usually required by courts of equity, because, while the parties were waiting for the case to come to trial, they had used what the lender described as a “stalking horse” and the judge called a “phantom purchaser” to try to extract £8.65m from the landlords for a surrender of the leasehold interest.
Relief
The judge accepted that SHB had deliberately broken its keep-open covenant when it decided to close the store. However, it had not behaved wilfully; it was insolvent. And the lender was not liable for the breach of covenant at all.
If the landlord were to recover possession of the unit 100 years sooner than expected, and a tenant such as Primark were to take a new lease, the value of the reversion would be enhanced. But any windfall would be irrelevant if the lease had no value. After all, why should the court be troubled because a landlord stood to gain by forfeiting a lease, if the tenant would lose nothing at all?
However, there was evidence to suggest that, despite depreciating in value, the lease was worth more than £1m. And, despite the fragility of the market, Sports Direct had expressed an interest in the premises. So, there was a real, rather than a fanciful, prospect of finding an assignee.
Therefore, although their use of a “phantom buyer” had come close to crossing the line between “hard commerce and fraud”, the judge decided that it would be wrong to deprive SHB of the opportunity to reduce its debts, and the lender of its security.
Consequently, the judge granted relief from forfeiture on condition that the lease was assigned to a third party within three months. A tall order perhaps, but it will be lack of market interest that delivers a coup de grâce, and not the court.
Allyson Colby is a property law consultant