What is a keep open clause?
A keep open clause obliges the tenant to keep premises open for trading. They are most commonly found in the retail sector.
Why do landlords include them in leases?
A landlord may include a keep open clause for a number of reasons:
- If the unit is in a larger shopping centre, its closure could have an adverse effect on the centre as a whole. This may be in terms of footfall (particularly if the tenant is an anchor tenant), rental levels, or the marketability of nearby units to other potential tenants.
- If the lease contains a turnover rent element, whether or not the tenant is trading will impact on how much rent the landlord receives. It is common for the lease to require the tenant to pay turnover rent based on a notional turnover in the event that the premises are not kept open.
Are tenants actually forced to keep open?
Whether or not a tenant will be forced to keep its premises open will differ depending on whether the premises are north or south of the border.
In England & Wales, if a tenant breaches a keep open covenant, the landlord will have a right to damages, but the landlord will not have a right to an injunction to force the tenant to keep open and trade. The House of Lords, in Co-Operative Insurance Society v Argyll Stores (Holdings) , said that there were several grounds for refusing to grant an order for specific performance, including the difficulties of enforcement and supervision by the court.
The result of the House of Lords’ judgment is that it is very unlikely that a court in England & Wales would ever order a tenant to keep a business trading; damages will be an adequate remedy for the landlord. But that leads to another issue – how will the landlord demonstrate the loss that will result from the tenant closing its premises?
The Scottish courts are willing to take a different position. In Scotland, provided that the relevant provisions of the lease are sufficiently clear, the courts will only refuse an order for specific implement (the Scottish equivalent of specific performance) in exceptional circumstances. The result is that landlords of Scottish premises can force their tenants to keep trading. The key to an order being granted is the clarity of drafting of the keep open clause. It must state for what use the premises are to be kept open, and it is preferable for hours of opening to be specified.
What should landlords do?
In England & Wales, a keep open clause is extremely unlikely to be enforceable. If the landlord is including a turnover rent element, it should ensure that there is a notional rent payable if the premises remain closed for more than a specified number of days. Whilst this will not keep the premises open, and will not avoid issues of reduced footfall and desirability of the neighbouring units to other tenants, it will protect the landlord’s rental income.
For properties in Scotland, clarity of drafting is key. However, the landlord must weigh up the advantages of being able to enforce a keep open clause because it has restricted the permitted use, against the negative impact that this could have on rent review (as it could be viewed as an onerous clause). The keep open clause must be considered in the context of the entire lease, and not in isolation.