Keep open provisions are important to hospitality businesses who want to ensure they are able to stay open for trade. They are also important to a landlord where there are turnover rents – particularly where the tenant is paying a reduced rent and shares the risk of a non-performing unit with the landlord.
If a restaurant or pub finds that a unit is not performing well, continuing to trade at a loss may be commercially unacceptable and the operator may consider whether to keep it open. But how does this conflict with keep open clauses that have been negotiated on the unit?
Key considerations for hospitality tenants in this scenario:
Enforceability of trading obligations
- Can the landlord take any action to enforce their trading obligations? A landlord will have the right to damages if a restaurant operator does not comply with its trading obligation, but will not have a right to an injunction to force the operator to keep its unit open. Courts take the view that a tenant should not be forced to trade an unprofitable outlet where compensation by way of damages is an adequate remedy.
- Operators with portfolios of units in both England and Scotland should be aware however that the position over the border is quite different. In Scotland a breach of contract entitles the injured party to a legal right to sue.
- BEWARE: where a tenant has underlet its unit and the occupier ceases to trade from it, the original tenant may still have continued liability under their keep open covenant.
Considerations on whether to cease trading
- Liabilities under the lease will continue even when a restaurant is closed, as this does not amount to a surrender of the lease – unless there is a formal deed of surrender or the landlord accepts the keys back.
- The tenant will still be responsible for paying all rents, rates and other outgoings, as well as having repair obligation.
- This applies even if compensation has been paid to the landlord for the breach of the keep open clause.
Negotiating the best keep open clause for your hospitality business
Most shopping centre landlords can insist on a keep open provision in a lease; typically only the big stores or anchor tenants have sufficient bargaining power to refuse. Smaller restaurant operators will have to accept such provisions in their lease.
There are a few ways, however, to mitigate the impact of such provisions when negotiating the lease:
- Make sure you are clear what the agreed trading hours are. Most landlords use a standard form lease which may not take account of the different position of a restaurant operator compared with other retailers. If your restaurant does cover all day parts an obligation to open for trade when other retail units open is onerous.
- Check that surrounding units are under keep open trading obligations for the times when your unit is required to be open – or you may be forced to open for trade despite their being no footfall.
- Ensure any such provision is subject to industry standard exemptions, such as being able to close for alterations or for staff training.Beware qualifications to these exceptions – eg does the exception permit temporary closure for repair/alterations only for major works? Some works which cannot be economically undertaken without closure may not qualify for the exemption and may trigger the keep open provisions.
- Where turnover rents are payable under the lease, an operator should ensure that the permitted exemptions are discounted from the obligations to pays any LADS (compensation for delays) on days where they are closed. A “grace period” might be negotiated.
- Try to negotiate a reduced liability for rents and other payments in the lease and for other covenants such as repairing/reinstating. If forced to cease trading liabilities for the remainder of the lease and its dilapidation obligations will be minimised.
- Ensure that you have sufficient scope to assign or underlet your lease so the unit can be disposed of easily. This includes ensuring that any landlord pre-emption rights are not likely to defeat the right to assign the lease.
Landlords’ rights to terminate the lease for non-compliance
If an operator needs to close their unit temporarily they may be concerned about termination of the lease as a result. A lease will normally allow the landlord the ability to forfeit the lease by re-entry for any breach of covenants (including the obligation to trade under keep open covenants).
A landlord can terminate a lease for breaches of keep open clauses, but positive lease covenants – requiring the tenant to do something positive (eg remain open for trade) – are capable of remedy by performance.
If a tenant is in breach of its keep open obligation the landlord must first serve a s146 notice, allowing a reasonable time to remedy the position before it is able to exercise its rights of re-entry.
If a Landlord has consented to the closure, or does not act, then its right to forfeit may have been waived. A breach of a keep open covenant is deemed under law to be a “continuing breach” rather than a “once and for all” breach which means that a fresh right for the landlord to forfeit will arise whenever the there is a breach of keep open obligations.
A restaurant which remains closed for long periods, or which is regularly in breach of its keep open obligations, should tbear this in mind and seek specific consent from the landlord to the closure where possible.
When taking a new lease in a shopping centre ensure that the terms of the keep open clause are negotiated as far as the landlord may permit to give maximum flexibility for the business and to avoid paying out more in damages than necessary should you have to close temporarily.
For operators of existing units (particularly in Scotland) a careful costing of any closure (both of potential damages payable to the landlord and any continued financial liabilities under the lease) needs to be carried out to determine the question “to trade or not to trade”.