Can a Tenant be forced to continue trading in loss-making circumstances?

This is a question that many shopping centre owners are asking themselves on a more regular basis in the present economic situation. It is common knowledge that retail sales figures are under pressure in the country, with the result that many tenants, even national tenants, are exploring the possibility of rather closing their stores whilst continuing to pay the rent, than continuing to operate under potential loss-making circumstances. The question is, what can a landlord do in this situation?

The first step would be to consider the agreement of lease concluded between the parties. Does it contain a clause providing for continuous trading, properly stocked and staffed, during the shopping centre’s normal trading hours? Also, does it specify the use of the leased premises whilst prohibiting any other uses? If both of these questions are answered in the affirmative, the landlord should be able to take action against a tenant who unlawfully fails to trade from the premises.

The second step will be to consider the type of remedy required. Normally, when a party is faced with a breach of a contract by the other contracting party, the innocent party has one of two choices: either accept the breach and then cancel the lease and claim the resultant damages, or reject the breach and demand specific performance of the lease obligations. The remedy of cancellation and a claim for damages is well-known – the landlord is entitled to claim damages in the form of lost rentals and other charges from date of cancellation of the lease to the date that the lease would have expired, or until the premises is re-let, whichever is the earlier. It is important to note that a landlord has a duty to mitigate its damages, by re-letting the premises as soon as possible. This post, however, focuses on the second remedy.

At the outset, the basic principle is that an innocent party is always entitled to insist on specific performance of contractual provisions subject only to the court’s discretion. The onus then rests on the defaulting party to show why specific performance should not be granted. It is generally accepted that there are four “excuses” that would warrant specific performance not being granted, being:

  • Impossibility to perform that which is being sought;
  • Undue hardship that will be suffered by the defaulting party if specific performance was to be granted;
  • It will be too difficult to enforce specific performance; or
  • Insufficiently clear-cut relief is being sought.

It is therefore for the tenant to convince the court that any of these four grounds exist, before the court will come to the tenant’s assistance.

In our experience with these types of matters, we have been more often successful than not, and the main defense raised by tenants in these types of applications are that they will suffer financial hardship. In our view, this defense ought only to succeed if continuing to trade will entail the tenant trading under insolvent circumstances, as envisaged by the Companies’ Act, i.e. where the liabilities will exceed the assets. This will also render the directors personally liable for the companies’ debts. Obviously, no court will order a tenant to continue trading under such circumstances.

One important aspect to keep in mind in these types of situations is that a landlord usually cannot allow a tenant to not trade, and therefore usually requires urgent action to be taken. Delays should therefore be avoided.

Therefore, where a tenant indicates that it intends to stop trading, immediate action should be taken, and legal advice should be sought urgently.