Open and shut case

The specific performance of a keep open covenant is no longer a remedy for a landlord whose tenant ceases trading, so Wayne Clark looks at other options. Wayne Clark is a barrister at Falcon Chambers.

What can a landlord do if his tenant, who has covenanted to keep a premises open for business, decides to shut up shop?

A landlord would obviously want to avoid the adverse financial consequences of a vacant site; but cannot, as a result of the recent House of Lords decision in Co-operative Insurance Society v Argyll Stores (Holdings) 1997 23 EG 141, claim specific performance of the covenant.

However, there are alternatives for the landlord wishing to avoid the detrimental effects of a non-trading unit.

A landlord faced with a breach of a keep open covenant by the tenant may, as a matter of drafting, seek to overcome any difficulties caused to him by the Argyll case by seeking to secure some entitlement to enter upon the premises and undertake an activity for his own benefit without bringing the tenant's lease to an end. This idea stems from the decision of Jervis v Harris 1996 1 All ER 303, CA, which upheld a landlord's entitlement to enter premises under an express contractual right.

Legally, it seems that there ought to be no difficulty in reserving a right of entry that enables the landlord to make beneficial use of the premises, but without terminating the tenant's interest in them.

If the landlord reserves a right to enter upon the premises, the exercise of that contractual right ought to scotch any suggestion of forfeiture or surrender of the lease.

The landlord's entry and subsequent occupation is contained in the contract. It is not an act seeking to bring about a determination of the tenant's leasehold interest but it is an act consistent with the terms of the lease, that is to say an exercise of a contractual right contained within it (see the recent decision in Charville Estates v Unipart Group 1997 EGCS 36 where the landlord entered to “dress” the windows in the absence of a contractual right of entry and the tenant argued that the lease had been surrendered as a result).

On a practical level, as a matter of drafting, a landlord may reserve rights of entry that can be of practical benefit. He must, however, restrain his enthusiasm for any attempt to reserve, in the lease, a right to carry out some or other business, or even a tenant's business, on the premises.

One useful right in the case of shop closure would be to reserve a right to enter to dress the shop window.

It is easy to understand the desire of a landlord, where a tenant has shut up shop, to alleviate the visual impact of an abandoned shop premises by entering to ensure the windows are properly dressed and to seek to recover the costs of the dressing from the tenant (see Charville Estates).

This ought to be simple to achieve – it could be done by drafting a reservation of a right to dress a window (for example “to dress and/or stock the windows with such goods and in such manner as the landlord in its discretion thinks fit”).

As a matter of carrying out the dressing, little is involved other than physically going on to the premises to dress them. Costs should not be substantial because there would be no continuous activity undertaken by the landlord and so there would be little upfront expenditure which is usually (in the dilapidations context) a deterrent to implementation.

Further, there is no reason why, for example, a landlord should not provide for a right of entry to secure the premises against vandalism and recover the costs of such expenses from the tenant, whether they be one-off or continuing (for example, including maintenance expenses such as lighting of windows and removal of graffiti).

Another right of entry, that might be effective, could possibly be secured where there are circumstances in which the landlord could, without difficulty, use the tenant's premises to the landlord's advantage.

For example, where the premises include a car park (such as at a supermarket) a landlord, upon the tenant ceasing to carry on its business, could exercise a contractual right to use the car park for customers or tenants of other shop units. This should involve little effort on the part of the landlord: the running of a car park does not require a vast workforce, and it should not detract from the landlord's primary objective of looking after his property portfolio.

The final option for a landlord would be to reserve the right of carrying on the tenant's business himself, but this seems unlikely to be effective. In most cases, the landlord would be faced with retail premises that are either totally vacant or a business that is in the process of being wound down (where a longer period of notification has been given enabling the landlord to take action before its final closure).

The immediate problems facing any shop tenant starting business will then face the landlord. He may seek to avoid part of the substantial start-up costs by providing that upon stopping the business the tenant must not remove fixtures and fittings. But the landlord must still manage the business himself. He could employ, by way of analogy to a receiver for a company, some sort of manager. But, as with a receiver, the landlord is still faced the problems of employing a sufficient workforce to undertake the business, obtaining reliable supplies of goods to be sold, and making sufficient profits to pay for the immediate outgoings in carrying on the business.

And these problems lead to more practical questions. Can the landlord take over the tenant's stock; can he have access to the tenant's confidential papers; can he require the tenant (in the case of branded goods) to deliver them to him; and can he take over the tenant's workforce and the contracts is has for supplies?

Landlords would be conscious of the moral of Evans

Clayhope Properties [1987] 1 WLR 225, where the receiver was unable to obtain from the landlord any shortfall where the assets over which he was appointed proved inadequate to meet his remuneration.

So he must be confident that the business will be adequate to meet the likely costs that he will incur by running it.

It may be that draftsmen, encouraged by Lord Hoffmann's suggestion that precision in drafting renders the subject matter more amenable to an order of the court, will attempt to “tighten up” covenants by providing for the obligation to be result-oriented. For example, in the context of a business, they could provide for the business to attain a set level of trade.

Although the House of Lords decision reinstates the traditional view of the non-enforceability by specific performance of a covenant to carry on a business it may, nevertheless, be the progenitor of complex covenants that attempt to ensure the landlord's financial interests remain unaffected by the tenant's closure.

Time will tell how effective these new measures may be.