In SHB Realisations Limited v Cribbs Mall Nominee (1) Ltd [2003] WLUK 588, Bristol County Court ruled in favour of SHB Realisations Limited (formerly British Home Stores) (“SHB”) in an important decision concerning relief from forfeiture when the tenant is, and will remain, unable to comply with a lease covenant requiring them to keep the store open.

Facts

In 1998 SHB was granted a lease for 125 years over a large unit within The Mall, Cribbs Causeway (Cribbs Mall) in Bristol. In exchange for a premium of £7m plus VAT, SHB occupied the fourth largest store in the mall at a peppercorn rent. The lease contained a ‘keep open’ covenant, which required them to maintain trade at the store, and gave the landlord the right to forfeit the lease in the event this covenant was breached.

SHB ceased trading at the unit in Cribbs Mall during August 2016, shortly before going into administration and changing its name to SHB Realisations Limited. SHB made numerous attempts over two years to sell its leasehold interest in the store, but was unsuccessful. As a result of this, the landlord served a section 146 notice, followed by forfeiture proceedings, citing that the keep open covenant had been breached.

SHB and its lender, GB Europe Management Services Limited (“GB”), both sought relief from the court and more time to complete an assignment, which under the terms of the lease was permitted, albeit with the landlord’s consent, not to be unreasonably withheld. The landlord counter claimed for possession and mesne profits.

At the date of the trial in January 2019, there was still 104 years left to run on the term of the lease and given the high premium paid for the unit, SHB claimed it wanted more time in which to assign the lease. This was notwithstanding it had already been unsuccessful in finding a prospective new tenant for two and a half years.

The issues which were debated were as follows:

1. SHB was (and still is) in deliberate, but not wilful, breach of the covenant;
2. It had an asset which was one of considerable value and it should not be deprived of the opportunity to reduce its debts;
3. GB is a secured creditor and it should not be deprived of its security;
4. There is still a market for the lease;
5. The lease has a value of over £1m;
6. The breach of covenant is irremediable  and will continue until an assignee is found;
7. The landlord will suffer ongoing damage;
8. If the landlord is unable to recover possession, it will be unable to devise and implement strategies for the entirety of the mall for the landlords benefit and the benefit of all retailers in the mall;
9. The claimants’ hands were not clean and there was strong criticism of their attempt to use a phantom purchaser to trick the landlord regarding the pre-emption rights which the court held verged on fraudulent;
10. The court can impose conditions particularly with respect to time limits.

The decision

The Court heard extensive evidence from each parties respective letting experts about whether the lease was marketable, taking into account its terms and the nature of modern retailing. They also considered the potential windfall that the landlord would obtain should the lease be forfeited, but did not give it ‘great weight’ in these circumstances.

The judgment, which was handed down on 1 April 2019, entitled SHB to relief from forfeiture on the condition that the lease was assigned by 5pm on 28 June 2019.

In weighing up each parties interests, on the one hand, the Court sympathised with the landlord’s view there was no market for the lease so little would be lost by SHB should its claim for relief be rejected (this was evidenced by the fact the store had been boarded up for over two years, which was negatively impacting the Mall). On the other hand, the Court agreed with SHB, there was still a chance that an assignee could be found, and it should not be deprived of the chance to locate one.

However, despite the three month extension SHB was unable to successfully assign the lease; and as at October 2019, the large unit at Cribbs Mall still remained unoccupied.

Comment

This decision highlights a long lease can be forfeited for breach of a covenant, even when the consequence would be a huge loss to the tenant and a potential windfall to the landlord.

It also establishes that where a breach of covenant is irremediable, and the landlord is suffering ongoing damage, strict time limits will be imposed on the tenant seeking relief from forfeiture.

This will almost certainly not be the last case of its kind with the growing demise of high street businesses, as well as the rise in insolvencies amongst well established brands. Many of these brands which have long leases on stores that they have been operating out of for years, will likely find themselves in a similar position to SHB.