Tenants of retail premises may be surprised to find a clause in a prospective leasing arrangement prescribing their opening times. After all, it is your business, and you may wonder why the landlord gets a say in your opening hours. For landlords, particularly owners of larger retail complexes, there may be genuine concern about the negative impact of closed units on the appeal of the centre. In a commercial environment where online operations are surpassing sales in physical premises, keep open clauses act as an assurance to landlords from tenants closing up shop. Keep open clauses are therefore a hot topic and often a key point of negotiation in retail commercial leases.
In this article, our experienced commercial property solicitors explore the enforceability of keep open clauses in commercial leases and the implications for both parties involved.
Contents:
- What is a keep open clause?
- Why are keep open clauses included in contracts?
- What are the benefits of keep open clauses for landlords?
- Why would a tenant agree to a keep open clause?
- What terms should be included in a keep open clause?
- Can keep open clauses be revoked or amended?
- Are keep open clauses enforceable?
- What happens if a tenant breaches a keep open clause?
- Are there any alternatives to keep open clauses?
- Summary
What is a keep open clause?
A keep open clause typically appears in a retail commercial lease, but can also be found in leisure and hospitality sectors, as well as other types of commercial business operations. A keep open clause imposes an obligation on the tenant to continually operate their business in the leased premises for the duration of the lease. This clause is intended to ensure that the property remains active and attractive to customers, which in theory benefits both the tenant and the landlord. The specifics of keep open clauses will be determined by the wording of the lease – some may prescribe particular hours and days the tenant must remain open, while others may be more general in nature or cite standard hours. Either way, it is crucial to perform a careful review of any proposed lease to understand the obligation as it applies.
Why are keep open clauses included in contracts?
- Maximising income: Keep open clauses are particularly important for landlord’s of turnover rent leases, where the amount of rent a tenant pays (or part of it) is linked to the revenue it generates from the leased premises. The direct correlation between the tenant’s performance and the landlord’s income makes keep open clauses a core feature for landlord’s to maximise revenue.
- Minimising loss: If a tenant purports to close down a store or reduce its operating hours, and this has a detrimental effect on the landlord’s income/investment - technically speaking the landlord could seek an injunction preventing them from doing so citing the keep open clause, or sue for damages.
What are the benefits of keep open clauses for landlords?
- Protecting investment: Landlords of retail or leisure complexes have a keen interest in ensuring the property remains active, accessible and attractive to customers, which in turn can sustain or even increase the desirability, prestige and overall value of the landlord’s investment. This can be advantageous for landlords in terms of potential resale value or refinancing opportunities. Vacant or closed premises may have the opposite effect - making the venue appear neglected, less thriving or appealing to both consumers and prospective tenants.
- Securing rent: There is also the simple idea that without being continually open to trade, tenants make fewer customer transactions and generate less income. If one of these retailers goes into administration, this is detrimental to the landlord’s income. The landlord can feel more certainty as to a return on investment through consistent rental income from the continuously trading leased premises.
- Maintaining control: In a changing and ever-digitalised commercial environment where businesses may be tempted to reduce overheads, reduce their physical presence, and focus online or seek to change their business models/operations in the face of competition, landlords may be left facing uncertainty, inconsistency and ultimately subject to the individual commercial decisions of their respective tenants. In a large retail or leisure complex with multiple units, landlords understandably want some consistency and control, and keep open clauses offer a solution.
- Reducing losses: Where keep open clauses are included in leases, there is a potential for the landlord to recover damages for losses sustained due to the tenant failing to keep their shop open. Their inclusion in the lease can also act as a deterrent to the tenant from taking any action that can be in breach of the clause, and result in costly litigation.
Why would a tenant agree to a keep open clause?
- Desirable location: In competitive commercial real estate markets, tenants may agree to keep open clauses to secure premises in a sought-after location or retail complex.
- Mutually beneficial: Although keep open clauses may seem overly prescriptive for some tenants, consistently keeping the business operational can help tenants attract more customers and build brand visibility.
- Increased footfall: Tenants may agree to keep open clauses in retail complexes to capture the strong foot fall as a result of the presence and operation of certain ‘anchor tenants’ ie popular, established brands. Landlords may insist that similar keep open clauses are maintained in all leases for consistency and to ensure the surrounding units of anchor stores remain open adding to the desirability and feel of the centre / complex. As popular as anchor brands may be, vacant or closed surrounding units may detract from this.
- Lease negotiation: Tenants may agree to keep open clauses as part of broader lease negotiations, especially if the landlord is offering other favourable terms or concessions. In some cases, it may be a trade-off for other lease terms that are important to the tenant. For example, landlords may offer reduced rent or other financial incentives in exchange for the tenant agreeing to keep their business open during specified hours. This can be particularly attractive for tenants who are seeking to minimise their occupancy costs.
What terms should be included in a keep open clause?
- Obligations to remain open: The clause should specify a positive obligation on the tenant to keep the property or retail unit open for trading.
- Hours of operation: The specific days, times or hours during which the tenant must keep the business open should be clearly stated in the clause, although this can be achieved by reference to the trading hours of the centre.
- Exceptions: The clause should specify in what circumstances a tenant will be exempt from the keep open obligation, such as:
- carrying out maintenance, repairs or alterations permitted or required by the lease
- staff training or away days
- in anticipation of an authorised assignment or underletting of the lease
- health and safety reasons, including pandemics e.g. Covid-19 where staying open would contravene government regulations
- where it is not possible to occupy or access the property or retail unit due to damage or destruction of the centre
- where occupation or trading would result in a breach of any other provision of the lease
Can keep open clauses be revoked or amended?
Keep open clauses can potentially be revoked or amended, but this usually requires the agreement of both parties involved. It is rare for either party to agree at the outset to a unilateral variation of the lease without the other’s consent. If either the landlord or the tenant wishes to make changes to the keep open clause, they would typically need to negotiate and formalise the changes through a lease amendment or addendum. It's important to carefully review the existing lease agreement and consult with experienced commercial property solicitors to ensure that any modifications to the keep open clause are properly executed and legally binding.
Are keep open clauses enforceable?
While landlords may successfully incorporate keep open clauses in commercial leases, in reality, they can be difficult to enforce, particularly where they place an unduly onerous burden on tenants.
There are usually three possible remedies available in the case of a breach:
- Interdict / injunction or specific performance/ specific implement: This legal remedy aims to enforce the specific terms of the lease and involves the landlord obtaining an order from the court preventing the tenant from winding down or ceasing to trade from the premises if it intends to do so or compelling it to reopen if it has ceased to trade or wound down operations. The courts have been notoriously reluctant to enforce keep open clauses by specific performance, save in exceptional cases. The court’s view is that it is not in the public interest to force someone to carry on a business at a loss if there is an appropriate alternative available by which to compensate an injured party (damages below).
- Damages: This may include financial losses incurred by the landlord due to the tenant's failure to keep the premises open, such as loss of rental income or damage to the landlord's business interests, to the extent it is attributable to the tenant ceasing to trade. Case law shows that compensating landlords by way of damages for breach of keep open clauses is the preferred approach by courts to specific performance.
- Forfeiture: If the tenant is in breach of a positive covenant to keep open contained in its lease and the lease contains an express forfeiture clause, then the landlord can take steps to forfeit the lease.
Even where a breach is established, the remedies available to the landlord may not be practical, viable or workable. For example, a tenant who is struggling to perform or who has gone insolvent, there is little use in forcing it to remain open and operate at a loss. If a tenant is breaching the opening hours and the landlord forfeits or terminates the lease, they may then be faced with difficulty in re-letting the premises particularly in times of economic downturn. If seeking damages, the landlord must be able to attribute the loss to the tenant’s breach of the keep open clause, which can be tricky – the landlord would need to prove that the reduced operating hours or closure of a store directly impacted its return on investment / overall value. This tends to be easier when it comes to anchor tenants – the large, prestigious brands which drive footfall to the centre, and which smaller tenants rely on.
It is worth noting that the position north of the border is different to England. In Scotland, courts are more willing to enforce a sufficiently clear keep open clause that specifies the opening hours and use of the property (nature of trade) in those opening hours. This means that landlords of premises in Scotland can compel their tenants to keep open and trading.
What happens if a tenant breaches a keep open clause?
If your tenant has reduced its operating hours, failed to open and trade on set days, ceased to trade (or is about to) – the first step a landlord should take is to carefully review the wording of the clause in the lease agreement. The keep open clause in the lease should be sufficiently clear in its terms to establish a breach. It is best to consult with an experienced commercial property solicitor right away, who can examine your contract, explain your options, advise how best to proceed, and issue court proceedings if necessary. For any legal action, your commercial property solicitor will be able to help you put together a compelling case to prove that a store closing or reducing its operating hours detrimentally impacts the rest of the development, and/or explore how best to quantify any financial losses attributable.
It may just be the case of communicating with the tenant, negotiating temporary concessions, or reminding them of their obligations.
If your preferred method of dealing with the breach by the tenant is to terminate the lease by forfeiture, you must first serve a s146 notice allowing the tenant a reasonable time to remedy the position.
Landlords should remember that even if the tenant has reduced its operating hours or ceased to trade, it will still be responsible for paying all rents, rates and other outgoings under the lease (until and unless it is terminated), as well as complying with other obligations under the lease such as repair and maintenance of the property/unit. A breach of an obligation in the lease may also entitle a landlord to draw down on any rent security deposit, or call upon a guarantor.
Are there any alternatives to keep open clauses?
One alternative is a co-tenancy clause, which stipulates that a tenant's obligation to remain open is contingent upon the continued operation of specific anchor tenants or a certain level of occupancy in the shopping centre or building. This provides some flexibility for the tenant if the overall business environment within the property changes.
It has been considered whether a use clause could imply that the tenant should continue to use the property for this purpose (which would not be the case if they were to cease trading or close shop), the general consensus is that the courts would follow the same line of reasoning as keep open covenants when it comes to specifically enforcing a tenant to continue actively trading for a certain use.
Summary
The decision to agree to a keep open clause will depend on the specific circumstances of the tenant, the nature of their business, the bargaining power of the parties and, the overall lease negotiation process. Both landlords and tenants should carefully consider the implications of keep open clauses when structuring lease agreements. Landlords must review the specific terms of the lease and seek legal advice to understand the options available and the best course of action in the event of a tenant's breach of a keep open clause. Each situation may be unique, and the appropriate remedy will depend on the specific circumstances of the case. If you are a landlord or tenant faced with a keep open clause in your lease – call and speak to one of our expert commercial property solicitors today.
