COVID-19 – “Keep open” and other clauses to be aware of

If your lease has a keep open clause, the immediate concern is that the landlord will seek to enforce it if you have closed your premises, or are intending to do so.

To enforce a keep open clause a landlord must first pass a two-stage test:

1. There must be a legal right to an order (a prima facie case) – i.e the keep open clause must be valid, and the tenant must have breached it (or be about to breach it) by closing; and
2. The “balance of convenience” must favour the tenant being forced to keep open.

To pass Stage 1 the keep open clause must be sufficiently clear in its terms.  This is not always the case, so if your lease does contain a keep open clause there could be a question mark over its enforceability – do not simply proceed on the basis that it is valid.

As for passing Stage 2, a landlord would usually cite inconvenience as being (a) a detrimental effect on the investment value of their asset due to the tenant’s breach (for more on how that is quantified see below); and (b) the urgent need to maintain the status quo in the meantime.

From a tenant’s perspective, in the context of coronavirus, inconvenience would likely be based on the risk to staff and customers by keeping open, or indeed the fact that to do so would be in breach of current government guidance relating to the closure of all “non essential” businesses.

Even if Stage 1 can be passed, given the current government guidance in place it is likely that landlords will encounter difficulties in seeking to enforce such clauses, particularly if the courts adopt a sympathetic approach to tenants with a view to maintaining some for of business continuity throughout the current crisis.

That said, anchor tenants, or those with turnover based rents may encounter more bullish landlords who are quite willing to challenge closures and seek to claw back lost revenue or seek damages. Much will depend on the specific circumstances of each case however the vast majority of tenants will not fall into this bracket.

Statutory compliance

Leases will ordinarily contain an obligation on tenants to comply with all governmental statutes, orders, regulations and directions and so on. This would allow tenants to argue that they are not breaching their keep open obligations for so long as the current government regulations remain in place.

A court would have to assess if a statutory compliance clause took precedence over a keep open clause however based on the current government guidance it seems highly unlikely that a court would force a tenant to continue to trade from premises in breach of government regulations.

Irritancy and frustration

In theory a landlord could try to irritate the lease, citing the breach of the keep open clause as the grounds.

However, in order to persuade a court that any purported termination by irritancy would be effective, a landlord must first pass the “fair and reasonable landlord” test.

The question would be whether in “all the circumstances” a fair and reasonable landlord would seek to terminate the lease as a result of the breach in question. While it is not possible to say definitively, it is almost inconceivable that a court would agree that in the present circumstances a landlord has a right to force a tenant back into the premises on pain of termination of the lease.

As for irritancy for other grounds of breach (e.g non payment of rent), in the Covid-19 Bill currently making its way through Parliament the UK government has included protection against tenants being forced out of their premises owing to missed payments up until 30 June (and possibly beyond). At present the Scottish Government has not adopted equivalent measures however this would seem to be the direction of travel, so further developments on this are expected.

Turning briefly to the doctrine of “frustration”, this applies to contracts generally: if a contract is entirely frustrated (i.e. cannot be performed) by overwhelming unforeseen events then in certain circumstances it is simply regarded as terminated.  In the present circumstances our view is that the current Covid-19 pandemic does not amount to a frustration event, albeit this could change depending on how long the situation lasts.

Damages

Under normal circumstances a landlord would have a claim for damages caused by a tenant’s breach of contract by failing to keep the premises open.  These cases have been tried in the past and are very rarely successful.  The landlord would have to show that its overall property investment had been quantifiably damaged by the tenant’s failure to keep their premises open.  Cases in the past have tended to involve larger stores, particularly those in shopping centres where the centre as a whole is significantly affected by the closure.

Summary

What we are seeing is a concerted approach from the government to ensure business continuity and protection for tenants in these unprecedented circumstances. It seems likely that – within reason – a similar approach will be adopted by the courts considering the litigation which inevitably will arise out of the current crisis. If so, landlords may face a difficult task in substantiating claims. Tenants should do as much as they can to protect their position when shutting up shop - if you have closed your premises or if you are about to, some immediate points to consider can be found in my other blog.

If you would like to discuss anything in the blog, please get in touch.