Liability for breach of covenants post payment of damages for breach of keep open covenant

Retail leases often contain “keep open” covenants. It is well established under English Law that where a retailer closes a store in breach of this covenant the landlord’s remedy will be damages; the English Courts will not order a retailer to carry on trading. The position is different in Scotland where the Courts have been prepared to order both remedies.

If damages are awarded and paid, what is the tenant’s residual liability in relation to other lease covenants?

This issue was recently considered by the Scottish Courts in relation to a supermarket in a shopping centre in Dundee which had been closed in breach of a keep open covenant. In 2007, the landlord was awarded damages of some £600,000 to compensate it for both the resulting reduction in the capital value of the shopping centre and for the consequential loss of income from the other units.

The store remained closed and several years later the landlord served an interim schedule of dilapidations. The tenant tried to argue that as a result of the damages which it had already paid for its breach of the “keep open” covenant its repairing obligation should be construed differently such that it simply had to keep the premises wind and water tight until the expiry of the lease.

The Court disagreed. The previous proceedings had related solely to the tenant’s liability for its breach of the keep open covenant. At no stage had any claim been made by the landlord in relation to breach of any other covenants. Even though the premises remained closed and notwithstanding the damages which the tenant had already paid for its breach of the keep open covenant, the tenant remained fully liable to comply with all of its other lease covenants.

Douglas Shelf Seven Limited –v- Co-operative Wholesale Society Limited [2009] CSOH 3