Real Estate Update: Keep Open Covenant in a Lease
30 August 2016
The recent High Court decision in Thomas Thompson Holdings & others v Musgrave Group plc & others considered the enforcement of a “keep open” covenant in a lease and whether the tenant of the anchor supermarket unit in Carlow Shopping Centre would be forced to keep trading where it was operating at a loss.
There is no clear Irish authority on the enforceability of “keep open” covenants and no case law showing that an injunction will be granted compelling a person to carry on a business where the business is a losing concern.
In December 2015 Musgrave announced in the national media its intention to close the Supervalu store in the Centre in January 2016. The Plaintiff, the owners of Carlow Shopping Centre, sought an injunction restraining Musgrave from closing its Supervalu store, in clear breach of the “keep open” covenant in the lease. The Plaintiff claimed that this would cause irrevocable and irreparable damage to them and to the third party businesses in the Centre.
Musgrave claimed that abiding by the "keep open" covenant in the lease would cause them to suffer continuing trading losses until the end of the lease term in September 2018.
The court had to be satisfied that the Plaintiff had established a strong case that would be likely to succeed at the hearing. The effect of granting the order would force the Defendants to continue operating the Supervalu store until September 2018. Evidence submitted showed that Supervalu was operating this store at a substantial loss; €136,000 for the year ended 2012, €108,000 for the year ended 2013, €651,000 for the year ended 2014 and €582,000 for the year ended 2015.
The judge believed that the Plaintiff could not realistically be considered as having a strong case likely to succeed at trial and the Plaintiff’s case for an injunction must fail on this first hurdle.
The judge distinguished these facts from another Irish High Court case involving Tesco, where it had made a profit of €400,000 in the previous year and had taken a deliberate commercial decision to close its store in Athlone Shopping Centre and open another some 400 meters away in the Golden Isle Shopping Centre. The judge in that case considered these facts as very significant and granted an injunction.
By contrast in this case, Musgrave had invested heavily in the Supervalu store over the last 4 years in an effort to make it commercially viable.
Even though there was a "keep open" covenant where the tenant promised to keep its Supervalu store open, the lease explicitly provided for a breach of covenant and obliged the tenant to indemnify the landlord in respect of those breaches.
While a landlord might not be entitled to an injunction to prevent a tenant from complying with its “keep open” covenant, a landlord will be entitled to damages as a remedy for breach of covenant under its lease.
For more information, please contact a member of our Real Estate team.
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