Bell & Scott
Property Update, April 2007
Welcome to the April 2007 issue of Bell & Scott Property Update.
Property Update provides a round up of relevant case law and other items which
we consider may be of interest to those in the property industry.
In this month's issue we comment on a recent decision which provided the first Scottish award of damages for the breach of a keep open obligation, and a case concerning anti-competition clauses within a lease.
 |
|
Recent Decisions |
Closing Time? Not if the Landlord Gets his Way
The importance of understanding obligations under a Lease
The recent Court of Session decision in the case of Douglas Shelf Seven Limited (“DSS”) v. Co-operative Wholesale Society Limited (“CWS”) and Kwik Save plc (“Kwik Save”) saw the first award of damages for breach of a “keep open” clause in Scotland.
The case centres on a “keep open” clause contained within a lease of supermarket premises at Whitfield Shopping Centre in Dundee. These supermarket premises had been let to CWS in 1977 (on a lease not expiring until 2033), and sublet by CWS to Shoprite in 1993. Shoprite then assigned the sublease to Kwik Save Stores Limited (whose obligations were guaranteed by Kwik Save) in 1994. DSS had acquired their interest as landlords in 1994, before the store ceased trading in early 1995.
At the time the store ceased trading, there was a clause in the lease obliging the tenant to keep the premises open for retail trade during the usual hours of business in the locality. Following the store closure, DSS raised an action seeking damages against CWS for breach of that obligation. DSS claimed loss of capital value in the Centre, and loss of income (from other units). CWS brought Kwik Save into the action, arguing that Kwik Save had an obligation to indemnify them for any loss to CWS caused by Kwik Save’s closure of the store. By the time of the hearing, any issue between CWS and Kwik Save had been resolved, with the solicitors for Kwik Save representing both CWS and Kwik Save.
Both CWS and Kwik Save accepted that there was a valid and enforceable “keep open” clause in the lease (and thus sublease). However, CWS sought to argue they were not liable for any breach because, the landlord having consented to the sublease, it must have been accepted that CWS could not be under an obligation to ensure continuous trading.
The Court found that that argument did not allow CWS to escape their obligation under the lease. They did not breach the “keep open” obligation when the subtenant (latterly Kwik Save) was trading. However, when the subtenant ceased to trade, CWS were in breach of the obligation, since a sublease did not in any way sever the relationship between landlord and principal tenant.
That having been determined, the issue was largely one of calculation of the loss suffered by DSS. It was argued for CWS and Kwik Save that the correct point at which to measure the capital loss was at the point of the breach (i.e. back in 1995). The Court held that that would not put DSS back into the position they would have been in but for the breach – the usual method of calculating damages. Thus, the important figure for calculating loss in capital value was the most recent practicable date. It was also found that it was possible to claim that the breach of the “keep open” obligation in the lease of the largest (and as it was argued, anchor) unit in the Centre led naturally to losses resulting from being unable to rent other units (e.g. lost rental income and unrecovered service charges). Thus, such losses could also form part of the claim. More than £600,000 of damages was awarded.
Sheila Webster, Head of our Property Dispute Resolution team comments:
This is a significant case for landlords and tenants with retail property in Scotland. As may be recollected, Scottish Courts have previously, on several occasions, ordered retail tenants to continue to trade from a unit which the tenants intended to close. Where it is discovered prior to closure that closure is planned, then such an order is quite possible. We have even seen cases in Scotland where tenants who have ceased trading in clear breach of an obligation to continue trading have been ordered to recommence trade. The Courts in Scotland will not order someone to do what cannot be done, nor are they ever likely to order someone to trade where it is clear that will be likely to lead to insolvency. However, ceasing trade in Scotland where a lease requires continuous trading should not be done lightly. This is in stark contrast to the law in England, where such orders are not granted – damages being ordered to be paid instead. To date, however, in Scotland, no case had been reported involving an order for damages for breach of such an obligation. This, the first, is therefore ground breaking.
The landlords cannot be criticised for not seeking an order to trade – it is clear they were told (after asking about rumours of closure) that it was not intended to close the store, and, in any event, orders requiring tenants to trade were just beginning to be made in Scotland. The landlords were therefore left with little alternative but to seek damages. Loss in capital value was perhaps less difficult to prove here where what was involved was the anchor store in a small neighbourhood centre. Whether it would prove so easy where the store concerned was a smaller unit in a larger centre remains open to question. Linking capital value changes to such a unit might be considerably more challenging. The same could be said about showing that the closure of one unit led to difficulty in rental of other units.
What is clear is that closing a store in clear breach of an obligation to keep it trading leaves a tenant open to a risk not only of an order to keep trading, or resume trading, but if neither is possible, also leaves the tenant open to risk of an award of damages. That risk is undoubtedly much greater where the unit is a large or anchor unit. This should not be forgotten when considering store closure/restructuring programmes across the UK, where some property is in Scotland.
Case referred to: Douglas Shelf Seven Limited v. Co-operative Wholesale Society Limited and Kwik Save Group plc
The full text of the decision is available from the Scottish Courts website here
Too Many Jewellers Spoil the Shopping Centre
The initial intention of the parties is the paramount consideration in deciding contentious situations
Warren James (Jewellers) Limited raised an action against Overgate GP Limited in relation to the lease of a unit in the Overgate Centre, Dundee. Warren James was the Tenant under the Lease, Overgate GP the Landlord. The Tenant raised the action on the basis that the Landlord had breached a clause in the lease relating to the number of jewellers that were permitted to occupy units within the Centre during the period that the Tenant remained in occupation.
The whole action revolved around the wording of the following clause in the lease:
“4.3 Exclusivity – For so long as the said Warren James (Jewellers) Limited is the Tenant under this Lease, not in respect of any first letting (which means the first time the Landlord let the Lettable Unit in question and not in respect of any subsequent lettings) of any Lettable Unit to lease any such Lettable Unit (other than the premises and two other Lettable Units only) with its Permitted Use having specified as its principal trade or business the retail sale of jewellery.”
It was held by the Court of Session that while the clause was written in poor English it could be broken down into the following parts: condition, definition, obligation and proviso.
The condition is that Warren James should remain the Tenant under the lease.
The definition relates to “first letting”. This is defined as meaning “the first time the Landlord let (sic) the lettable unit in question and not in respect of (sic) any subsequent lettings”. It was held to be clear that the intended meaning is the first occasion any unit is let; this was not meant to include any subsequent lettings.
The obligation is that the Landlord is not allowed to grant a first letting of any Lettable Unit where the permitted use in the lease of that unit specifies the tenant’s principal trade or business as the retail sale of jewellery.
The proviso is that the obligation does not apply to the pursuer’s premises and “two other Lettable Units only”. The proviso only applies to each unit in addition to those mentioned, i.e. no more than three at any one time, to include the Tenant’s premises.
The wording of the proviso contains no time reference, and is accordingly equally capable of applying to past lettings and future lettings. Accordingly it was concluded that the Tenant’s construction of clause 4.3 was correct, and that the prohibition in the clause extends to any first letting of a Lettable Unit for, broadly speaking, the retail sale of jewellery other than the Lease to the pursuers and two other lets, whenever granted.
It was found that, in commercial contracts, words should be given their ordinary meaning wherever possible and that ambiguity should not be sought.
The disputed clause was to apply for the duration of the current lease. The prohibition was an anti competition clause in favour of the Tenant against too many jewellery stores being opened in the Centre. This being the intention of the parties to the lease at the outset, the Landlord was found to be in breach of the lease.
Paul Jennings, Head of our Retail and Leisure Team comments:
The parties here were never in dispute as to the essential principles of interpretation of an exclusivity clause of this type. It was agreed that the words should be given their ordinary meaning and that ambiguity should not be sought. It is difficult, therefore, to see how the Landlord could interpret the clause as allowing them to have five jewellers in the centre at any one time when clearly it was designed to legislate for no more than three. Perhaps a try-on, but an expensive one that didn't succeed.
The judges were very critical of the language and syntax of the clause and whilst drafting this type of clause is rarely straightforward, at least the message from the decision is clear: establish at the outset exactly what is meant by the exclusivity provision so carefully worded in the agreed heads of terms and keep the subsequent drafting simple. Otherwise, extrinsic evidence may have to be led to determine the intention of the parties and all of the budding Lynn Truss's in our midst will have a field day!
Case referred to: Warren James (Jewellers) Limited v. Overgate GP Limited
The full text of the decision is available from the Scottish Courts Website here
|
|
News |
Draft Climate Change Bill
The Government has published its draft Climate Change Bill setting out, for the first time, legally binding targets for the reduction of greenhouse gas emissions. The Bill requires the Government to set carbon targets based on five year periods. As part of the overall target it has also been stressed that a reformed planning system will have a major role in achieving the Government’s aims and objectives in relation to climate change.
The Department for Environment, Food and Rural Affairs (Defra) has also published a climate change strategic framework highlighting the importance of a move towards zero carbon developments. The move is to be aided by a planning framework that supports zero carbon developments through location, the design and the way the development is planned, taking into account greater use of renewable energy.
Draft Climate Change Bill available here
Defra Climate Change Strategic Framework available here
Planning Advice Notice (PAN) 81: Community Engagement
PAN 81 is seen by Scottish Ministers as an important follow up to the Planning etc. ( Scotland ) Act 2006. PAN 81 introduces new ways for people to get involved in shaping the future of their local area. The importance of listening to local people and understanding what they want from their local area is also stressed.
PAN 81: Community Engagement is available here
|
