Real Estate Building Blocks - Keep open covenants

Real Estate Building Blocks - Keep open covenants

Real Estate Building Blocks - Authorised Guarantee Agreement

A keep open covenant is a clause in a lease which imposes a positive obligation on the tenant to keep the premises open for trade during prescribed periods, which usually conform to normal trading hours. Keep open covenants are most often found in leases of retail premises within a shopping centre or retail park, particularly where an element of the rent is calculated based on the tenant’s turnover or where the unit is let to an "anchor tenant". Whether or not a lease will include a keep open covenant is usually agreed at heads of terms stage, given the high burden such an obligation places on a tenant.

Nature and form of the obligation

A keep open covenant will oblige the tenant to keep the premises open during prescribed periods, which may be defined as "trading hours", "centre opening hours" or something similar. If the premises are situated in a shopping centre this would usually match the opening hours of the centre. A typical obligation may require the premises to be open for trade for a full working day Monday to Saturday, slightly reduced hours on Sunday and exclude bank and public holidays. There may be an option for the landlord to adjust the periods, in which case it will usually be required to act reasonably when doing so.

Keep open covenants will invariably excuse the tenant from remaining open in certain situations where it would not be reasonable, lawful or even possible to insist on strict compliance. Common exclusions include:

  • Where the tenant is carrying out repairs or alterations to the premises (in the case of alterations, assuming the landlord has consented to them or they are otherwise permitted under the lease)
  • A period immediately prior to an assignment or subletting of the premises by the tenant
  • Staff training
  • Where the premises have been damaged or destroyed
  • Where continued trading/occupation would result in a breach of another provision under the lease or a government imposed regulation or requirement (such as government enforced closures during the COVID-19 pandemic)

Why do landlords use them?

A key driver in the success of a shopping centre or retail park is customer footfall, which is likely to be higher the closer the centre gets to full capacity. Landlords, therefore, want to minimise both the number of void or empty units at a centre and also the frequency and duration of any periods during which rented out units are not open for trade. Imposing a keep open covenant in leases is one method which will assist in achieving the latter.

Landlords will also seek to impose keep open covenants where the tenant pays a turnover rent, which is a rent based (at least in part) on the income the tenant produces from its use of the premises. As there will be a direct connection between the success of the tenant’s business carried out from the premises and the rent, the landlord will be incentivised to take steps to ensure that the tenant’s revenue is as high as possible. Therefore, most turnover rent leases will include a keep open covenant.

What are the remedies if the covenant is breached?

There are three potential remedies available to a landlord where a tenant breaches a keep open covenant: damages, an injunction (requiring the tenant to remain open) and forfeiture. In England and Wales, case law has shown that an injunction is almost certain not to be awarded. This is for public policy reasons, with the view of the courts being that such an injunction would likely require constant court supervision and that it is not in the public interest to force a business to operate at a loss where there is an alternative remedy (i.e. damages).

The problem for landlords is that to succeed in a claim for damages they need to prove loss. This may be possible where the tenant in breach is an anchor tenant, and the landlord can show it has suffered a loss because of that tenant being closed for trade. This might result in lower footfall at the centre leading to reduced rents both on new lettings and following rent reviews in existing leases. In the case of a non-anchor tenant, the landlord will face an uphill task proving that any loss it has suffered occurred because of that tenant not trading from its premises rather than another cause, such as a wider economic downturn or the shift to online retail.

Termination of the lease by forfeiture may be an option if the lease contains a forfeiture/re-entry clause, but the landlord should consider carefully whether this would be the correct approach. There are likely to be adverse consequences for the landlord if it is unable to readily re-let the premises following forfeiture, such as liability for business rates and insurance costs and it will again become responsible for the repair, maintenance and security of the premises until a new tenant is found. A tenant may also be able to successfully apply for relief from forfeiture resulting in the lease being reinstated.

The above is intended as a general overview of keep open covenants and is not a comprehensive analysis of the relevant law and background. If you have any questions on the above or require advice in this area, please contact our real estate team.

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