The acceleration of the retail apocalypse under Coronavirus

David Goldsmith

All Powerful Moderator
Staff member
Men’s Wearhouse parent company considering bankruptcy
Coronavirus has slashed demand for suits and formal wear

Men’s Wearhouse and Jos. A. Bank may soon join the growing list of retailers that have declared bankruptcy in recent months.
Tailored Brands, the retailers’ Houston-based parent company, has been reaching out to interested parties in an effort to restructure more than $1 billion in debt, according to Bloomberg. The plans are still in the early stages and the company may also seek alternative forms of financing, sources told the publication.
The retailer announced last month that it planned to reopen 300 stores by Memorial Day. Market conditions and reopening prospects will impact the company’s restructuring plans. A Men’s Warehouse store in Boston was looted last week during nationwide protests against police brutality.
Tailored Brands had been struggling for several years before the pandemic slashed demand for suits and other formal wear. The company’s sales have fallen every year since 2016, and its stock price has gone from more than $66 in 2015 to under $3 today. Its bonds have also gone from near par in February to just 30 cents on the dollar.
Law firm Kirkland & Ellis and investment bank PJT Partners are advising Tailored Brands on the potential restructuring, while a group of lenders is being advised by law firm Gibson Dunn and investment bank Houlihan Lokey.
 

David Goldsmith

All Powerful Moderator
Staff member

Chuck E. Cheese Approaches Bankruptcy, Could Have to Close All Stores

The popular children's restaurant is nearly $1 billion in debt, the Wall Street Journal reported

After months of keeping their doors shut amid the coronavirus pandemic, popular kid's restaurant Chuck E. Cheese may not ever reopen.
The brand behind the food-and-games establishment, CEC Entertainment, is nearly $1 billion in debt and is trying to approach lenders for a $200 million loan to keep the business afloat, according to the Wall Steet Journal.

On Friday, the brand announced it would be offering its top executives retention bonuses with the hopes that they would stay on in trying times.
CEC said it would pay nearly $3 million total to three executives, including $1.3 million to CEO David McKillips, the Securities and Exchange Commission filing showed.

The Texas-based restaurant currently operates 610 locations in 47 states but had to close its stores when the pandemic struck, making it extremely difficult for the company to raise capital.
In April, the brand said they were considering refinancing, bankruptcy and restructuring after the pandemic began to cause strain on the restaurant industry, the WSJ reported.

In an attempt to make money during the pandemic, the store masqueraded as Pasqually's Pizza and Wings on delivery apps, a reference to one of Chuck E. Cheese's bandmates.

Employees who were kept on board helped to operate Pasqually's as a takeout brand.
But Chuck E. Cheese is not the only restaurant chain to struggle amid the global health crisis.

Some outposts of IHOP, Denny’s, Ruby Tuesday, TGI Fridays and more have permanently shuttered due to hardships brought on by the pandemic.
CFRA Holdings, a franchisee operating 49 IHOP locations, filed for bankruptcy in early May and cited the coronavirus as the primary reason, according to FSR Magazine.
Aziz Hashim, the founder and managing partner of Ruby Tuesday owner NRD Capital, told Restaurant Business the pandemic will likely spur the closure of many more restaurants.


A Denny’s franchisee, Feast American Diners, closed 15 locations of the popular breakfast chain while locations of the Indianapolis-based chain Steak ‘n Shake and of TGI Fridays have also closed down permanently due in part to the pandemic.


 

David Goldsmith

All Powerful Moderator
Staff member
Projecting this year may see record closings 250% of last year's record setting pace.
These 25,000 retail dinosaurs will meet the meteor this year
A new report suggests Covid-19 will hasten the demise of retailers, especially in shopping malls

As many as 25,000 retail stores may close this year due to the coronavirus pandemic, with a majority closing in shopping malls, further hastening the industry’s decline.
That number would dwarf the prior record of 9,800 retail closures set in 2019, according to a new report from the retail data firm Coresight Research.
First issued in March, the report estimated that 15,000 stores could close in 2020, but as the reach of the coronavirus grew across the country, governments required many stores to close temporarily and shoppers were discouraged from venturing out.
For some businesses, those temporary closures may hasten the transition to digital commerce, or they may become permanent.
Coresight’s CEO Deborah Weinswig said in the report that the closure of department stores and large clothing retailers — so-called anchor stores — represents a particular threat to malls.
Already, 15 national retailers including Bed Bath & Beyond, H&M, Century City, AMC Theaters, Regal Cinemas, Party City and The Gap, have elected not to pay May’s rent. The company Macerich, which owns 47 shopping malls across the U.S., said it “collected about 26 percent of rent” owed by tenants in April, and sported a similar number as of mid-May.
Simon Property Group, the nation’s largest mall owner, sued The Gap last week for $66 million in unpaid rent across its properties. The mall giant this week also exited a $3.6 billion deal to acquire up-market mall operator Taubman, known in the industry for its quality anchor tenants.
Neiman Marcus, J.C. Penny, J.Crew, and Victoria’s Secret have gone beyond closing stores and filed for bankruptcy. The Mall of America has fallen behind on its $1.4 billion mortgage, exposing the wider bond market to systemic risk.
If damage done to the retail sector by coronavirus has been deep, any return to health will be slow and grinding. Anonymized cell phone data shows that foot traffic in malls that have reopened are just a quarter of what they were in January 2020, suggesting that the Coresight report correctly predicts many more closures ahead.
 

John Walkup

Talking Manhattan on UrbanDigs.com
Like office space, I do think we will see a resurgence in retail once old models crumble and new ones can be built. The 'see it, buy it, have it' mentality that's creating delivery messes will eventually merge with some kind of physical presence.
 

David Goldsmith

All Powerful Moderator
Staff member
Increased costs, decreased revenue.

Malls will need new air filtration systems before reopening
Cuomo recommends offices and other businesses looking into installing HEPA filters

New York malls may have to literally filter out Covid-19 before reopening.
Gov. Andrew Cuomo announced Monday that malls will be required to install high-efficiency particulate air filters, or HEPA filters, which have been shown to reduce the presence of the virus, according to CNBC.

The filters are designed to absorb particles that are .01 micron and above. The coronavirus’ particle has a diameter of about .125 micron, according to recent studies. However, it is not certain that such precautions would prevent coronavirus infections, since the virus is primarily spread from person to person.

Other indoor retailers have not been required to install HEPA filters, although Cuomo said that the state recommends that all businesses and offices “explore the potential for their air conditioning air filtration system.”
Malls have already been excluded from stage four of reopening, along with gyms and movie theaters.

In other states, malls have reopened at partial capacity, while owners feared the possibility of lawsuits from customers and employees if they did not install proper precautions.
In New Jersey, malls have been allowed to reopen with the same precautions as other retailers, but without the requirement for new filtration systems.
 

John Walkup

Talking Manhattan on UrbanDigs.com
True - but somehow malls are survivors. I'm sticking with my thesis that all things retail/non-prime location condos that are pretty much dead in the water should be turned into last-mile logistics hubs :)
 

David Goldsmith

All Powerful Moderator
Staff member
Nordstrom Notifies Landlords That It Will Pay Only Half of Its Rent for the Year
Nordstrom is the latest retail tenant to find itself at odds with its landlords.

The department store has reportedly notified the property owners of its namesake and off-price Rack outposts that it will pay only half of its rent costs for the rest of 2020.

According to Retail Dive, a letter from president of stores Jamie Nordstrom to landlords on Friday showed that the company would use comps as the basis for its decision to make its occupancy payments. The report suggested that Nordstrom would pay “up to a full reconciliation should 2020 sales reach 90% of sales made in that location in 2019.”
In addition, the retailer reportedly said that it would “continue to maintain insurance coverage, pay utilities on which we are the account holder and maintain your building(s) as required by the lease.”
FN has reached out to Nordstrom for comment.
The report came a day after the Seattle-based company confirmed that it was making steep cuts to its workforce as it continues to grapple with the coronavirus outbreak’s outsized impact on its business. A spokesperson wrote to FN that Nordstrom was “making adjustments” in response to shifting consumer behaviors but did not specify the number of roles that would be affected. (A Seattle Times article indicated that the chain had cut 6,000 jobs across the country last month.)
“We’re realigning and reducing our workforce to support our market strategy, including in our corporate support teams,” the spokesperson shared. “These types of decisions are never easy because we realize the impact it has on our people. We’re committed to taking care of them as best we can during this transition.”
Nordstrom has recently taken several steps to preserve liquidity and reduce expenses. It has drawn down its $800 million revolver, as well as announced plans to permanently shutter 16 of its full-time stores and three Jeffrey boutiques. It has also reduced the salaries of its top executives, while CEO Erik Nordstrom, president Pete Nordstrom and the board of directors are forgoing their pay for a portion of the year.
The chain’s first-quarter report in late May showed a net loss of $521 million, or a loss of $3.33 per share, compared with analysts’ expectations of a loss of 95 cents per share. Revenues for the three months ended May 2 fell to $2.12 billion from last year’s $3.44 billion, while market watchers anticipated sales of $2.41 billion. It attributed the declines to the COVID-19 health crisis, which forced the temporary closures of its locations for weeks.
Nordstrom isn’t the only retailer to skip out on its lease obligations as the pandemic throws its balance sheet into disarray: Urban Outfitters, H&M and Burlington have announced that they would not pay rent, while Gap and Ross have been involved in recent litigations filed by their commercial landlords, who are also struggling to meet their own mortgage terms.
 

David Goldsmith

All Powerful Moderator
Staff member
New York & Company parent files for bankruptcy
RTW Retailwinds plans to permanently close hundreds of stores

New York & Company’s parent company is the latest chain to file for bankruptcy as the coronavirus has piled additional pressure on an already challenging retail landscape.
RTW Retailwinds, whose other brands include Fashion to Figure and Happy x Nature, filed for Chapter 11 protection Monday, and has already kicked off liquidation sales, CNBC reported.
“The combined effects of a challenging retail environment coupled with the impact of the Coronavirus pandemic have caused significant financial distress on our business, and we expect it to continue to do so in the future,” RTW Retailwinds CEO and CFO Sheamus Toal said in a statement.

“As a result, we believe that a restructuring of our liabilities and a potential sale of the business or portions of the business is the best path forward to unlock value.”
The retailer expects to close most, if not all, of its 378 stores, which are located in 32 states. RTW Retailwinds’ e-commerce operations and related intellectual property may also be sold as part of the bankruptcy proceedings.

The company had warned of a likely bankruptcy filing in early June, and says that it now expects to fully repay the $12.7 million outstanding balance on a loan agreement with Wells Fargo.
About 92 percent of the retailer’s bricks-and-mortar locations have reopened following coronavirus-related shutdowns.
 

David Goldsmith

All Powerful Moderator
Staff member
Simon Property Group sics the lawyers on deadbeat tenants
Lawsuits filed against Eddie Bauer, Brooks Brothers, Gap

Simon Property Group has kept its promise to sue mall tenants who aren’t paying their rent.
On Tuesday, the country’s biggest retail real estate investment trust filed a lawsuit against Eddie Bauer, seeking to recover $6.2 million in missed rent payments. The outdoor clothing store chain has not paid rent since April, according to records filed in federal court.

Last month, Simon Property Group filed a similar lawsuit against Brooks Brothers seeking $8.7 million of missed rent, according to records found in Marion County Superior Court. Earlier this month, the 200-year-old clothing chain announced that it has filed for bankruptcy.
Simon Property Group CEO David Simon has made no attempt to conceal the company’s intentions in filing such suits, regardless of the coronavirus pandemic, which has shuttered stores and sent retailers into a spiral.
“The bottom line is that we do have a contract, and we do expect to get paid,” Simon said in a May earnings call.

However, those lawsuits may be nothing compared to the bill the Gap is facing. In early June, the REIT sued the Gap for more than $65.9 million in missed rent. The Gap leases more than 400 properties from Simon Property Group and is its biggest in-line (non-anchor) tenant in terms of rent.

Simon Property Group is among the many retail landlords facing massive rent nonpayment issues, even though the company’s own mortgage payments are due.
In June, national chain retailers paid about 68 percent of rent collections, according to a report from Datex Property Solutions. While that number has slowly been on the rise, many fear states once again shutting down due to spikes in coronavirus cases could be disastrous to retailers and their landlords moving forward.
 

David Goldsmith

All Powerful Moderator
Staff member
J.C. Penney implosion hits two New York City malls
Layoffs, closure dates announced for Manhattan Mall, Kings Plaza

J.C. Penney’s bankruptcy is resulting in a bloodbath for its employees and pain for its landlords.
The retail chain, which will close nearly a third of its 846 stores over the next two years as part of its bankruptcy restructuring, is laying off all of its employees in its Kings Plaza and Manhattan Mall locations.
J.C. Penney’s Manhattan Mall store anchors the retail property and served as the company’s introduction to the borough. The 150,000-square-foot Penney required a reconfiguration of the now 110-year-old building at 100 West 33rd Street by its owner, Vornado Realty Trust.
The store will close at the end of the month, costing 304 employees their jobs, according to a WARN notice filed with the state by J.C. Penney made public Thursday.
The notice cites Covid-19 as the reasoning behind the closings, although the company was struggling long before the pandemic. At the end of last year J.C. Penney had roughly $3.8 billion in debt.

J.C. Penney is also the anchor tenant for Kings Plaza Mall in the Flatlands section of Brooklyn, where 142 employees are being laid off through the store’s last day, Sept. 27, according to the WARN notice.
The sale of the mall was the largest commercial transaction of the year in 2012, when Macerich bought it from Vornado. Since then, malls, including Kings Plaza, have withered as e-commerce gained market share.

On Long Island, the retailer’s presence has already shrunk down to one location: Roosevelt Field Mall in Garden City.
In total, J.C. Penney expects to cut 1,000 of its roughly 85,000 jobs. The company’s biggest hope may be Authentic Brands Group, along with Simon Property Group and Brookfield Property Partners, which are reportedly in talks to scoop up the retailer.
 

David Goldsmith

All Powerful Moderator
Staff member
Delshah sues retailer Free People for $11M after terminating Meatpacking lease
Parent company Urban Outfitters stopped rent payments in March

The list of lawsuits between retail tenants and landlords grows longer by the day. More than demanding a few months in rent arrears, some landlords are now going all out to demand that tenants pay up the full value of their leases.
Michael Shah’s Delshah Capital is one landlord taking that hardline approach against Urban Outfitters subsidiary Free People. Delshah’s retail tenant at 58-60 Ninth Avenue in the Meatpacking District stopped paying rent in the early days of the coronavirus pandemic.

In a lawsuit filed late last month, Delshah says it terminated Free People’s lease on June 10 after the retailer missed two months’ rent. The suit seeks damages equal to back rent plus “all rent that would have been due for the remainder of the lease term” for a total of nearly $11 million.

The 6,800-square-foot Free People lease was set to expire in January 2027 and is worth $1.4 million a year, loan documents show. The property also has three residential units whose total annual rent was $297,600 in 2017.
Although the tenant paid a portion of its arrears in late May, the landlord says that this was not enough to cure the default on the lease. Delshah and Urban Outfitters did not respond to requests for comment.

Free People’s relationship with the landlord had been strained from the start, when Delshah delivered the space to the tenant more than a year later than planned, in the summer of 2016.
Claiming that the delay caused it to miss the 2015 holiday retail season and damaged its reputation and stock price, Free People sought 825 days of rent credit or nearly $3.2 million in damages. A judge eventually ruled that Delshah owed just $650,000 for the delayed delivery.

Delshah acquired the 11,000-square-foot mixed-use building for $18.2 million in 2013. In 2017, the developer secured a $28 million CMBS loan for the property along with another nearby retail building at 69 Gansevoort Street. Delshah sought Covid-19 relief for the loan in April, according to servicer commentary. The loan became more than 30 days delinquent in May but is now current.

Urban Outfitters announced in late March that it would not be paying rent at stores closed due to coronavirus. Urban Outfitters’ Herald Square landlord, Empire State Realty Trust, also sued the retailer last month over $1.2 million in unpaid obligations.

A similar lease termination dispute is playing out at a Gap store in the Financial District, where landlords Crown Acquisitions and Prime Property Fund are seeking to terminate Gap’s lease in a move that could leave the retailer on the hook for more than $60 million in future rent.

In other legal proceedings, Delshah recently secured two money judgments totalling $5.6 million against developer Jack Terzi, in connection with distressed notes on the retail condos at 27 West 72nd Street and 31 East 28th Street. Terzi had earlier accused Delshah of “colluding” with lender Signature Bank to manufacture defaults on the two notes.
 

David Goldsmith

All Powerful Moderator
Staff member
Gap claims it doesn’t have to pay rent at any of Brookfield’s malls
Brookfield sued the retail chain in June over non-payment of rent

Gap Inc. is firing back at landlord Brookfield Property Partners, a month after the latter sued the retailer for withholding rent.
Five of Gap’s chains — Gap, Athleta, Banana Republic, Old Navy, and Janie & Jack — sued Brookfield affiliates, claiming that its obligations to pay rent ended when government restrictions forced the company to close stores across the country, according to Crain’s Chicago Business.
In a complaint filed in Cook County Circuit Court, Gap argued that its leases with Brookfield should be modified or terminated because coronavirus-related restrictions made the core purpose of those leases “illegal, impossible, and impracticable.”

Gap also wants a refund of rent and expenses paid in advance for March 2020. The retailer alleged breach of contract, declaratory relief and unjust enrichment.
Gap operates 2,785 retail stores nationwide under its various brands and suspended rent payments in April for all of them. Mall owner Vestar was the first landlord to sue the company for unpaid rent in May, seeking $100,000 for rent at two California malls.

Brookfield sued Gap in Texas last month for $2 million in unpaid rent for stores in the state. Simon Property Group also sued Gap in June for $66 million in unpaid rent. Simon Property Group went on to sue Eddie Bauer and Brooks Brothers for unpaid rent last month.

While Gap is one of the most well-known companies to recently get into legal tiffs over rent, battles between other tenants and landlords are playing out across the country, with no signs of slowing. Many big chains, including Staples and LVMH Moët Hennessy Louis Vuitton, have skipped rent since the pandemic began.
 

David Goldsmith

All Powerful Moderator
Staff member
Inside the hardball legal tactics retail landlords are using against tenants
In the case of defaults, property owners are increasingly turning to “acceleration clauses”

If Guess thinks that its missed rent payment of almost $900,000 is a pain, what the retailer’s landlord is seeking in a lawsuit must be agonizing.
The 514-516 Broadway sublessor, Haim Kedmi, is suing the clothing brand, not only for the rent that they failed to pay due to the pandemic, but for over $6 million of rent and taxes that would have been due up until when the lease is set to expire in 2023, according to court records.
A similar legal battle is unfolding at 58-60 Ninth Avenue in the Meatpacking District, where Michael Shah’s Delshah Capital is duking it out with tenant Free People. The clothing shop owed nearly $200,000 for April through May rent arrears. Now, in addition to vacating the premises, Shah is seeking nearly $11 million in future rent payments.

Kedmi and Shah’s legal strategies both hinge on the so-called “acceleration rent clause,” a provision that lawyers say is common in commercial leases, but is often difficult for landlords to enforce and collect on.
“We’re in a brave new world here with these clauses that didn’t anticipate the environment we’re in now,” said Michael Feinstein, a managing partner of his own law firm and a Florida real estate broker.

Under the clause, a tenant who defaults owes their landlord the full amount of rent due over the course of the lease in one lump sum. However, many states, including New York, only allow landlords to enforce rent acceleration as a means of recouping damages. As a result, landlords must attempt to mitigate damages by finding a replacement tenant.

But that’s not always the case. Gap is currently suing its landlords, Crown Acquisitions and Morgan Stanley-managed Prime Property Fund, to prevent them from terminating the lease at 170 Broadway. If the lease is terminated, Gap could be on the hook for $60 million in future rent.

That’s all due to one section of the lease that reads: “Landlord has no duty to mitigate Tenant’s damages and may simply leave the Demised Premises vacant until the end of the originally stated Term and demand all rent from Tenant.”
John Kelly, an attorney with Bean, Kinney & Korman, noted that while landlords may attempt to enforce these clauses, it can be difficult to actually cash out.

“Obtaining a judgment is one thing and collecting is entirely something else,” Kelly said. “It’s important for landlords when they sign these leases to get as much credit as they can for these circumstances.”
Francis Gracia may be the latest personal victim of such collections. The artisan pizza king is being sued for almost $3 million, over $2.5 million of which accounts for future rent payments for the commercial space at 201 East 10th Street.

Still, while Feinstein acknowledges that the decisions will ultimately be up to judges, he expects many of the legal battles to end in negotiations, with the acceleration clause acting as leverage for landlords.
“Not all lawyers have the business sense and companies take these hardline approaches, and they don’t look at the big picture in terms of how to come up with a business-like resolution to the dispute,” Feinstein said. “A lot of these cases will get resolved. People just pull the trigger and litigate first and mediate second and that’s just the fire drill.”
 

David Goldsmith

All Powerful Moderator
Staff member
Commercial real estate lawyers: You’re stuck with that lease
Barrack, Mechanic confident that courts will back landlords over retailers

As the coronavirus has shuttered stores, reduced foot traffic to a trickle and dampened consumer demand, growing numbers of retailers are looking towards “impossibility of performance” and the doctrine of “frustration” as a way out of pricey leases.
But the real estate industry’s top lawyers say judges won’t buy it.

“The courts have said that frustration of purpose is really more nuanced in terms of the circumstances where it would come into play,” said Jonathan Mechanic, chairman of Fried Frank’s real estate department, on Wednesday’s edition of TRD Talks.

“If you applied that to every circumstance today by virtue of the pandemic, then no one’s paying rent. And obviously the result of that would be a sea of defaults” in New York and across the country, he added.
Mechanic was joined by Luise Barrack of Rosenberg & Estis, who heads the firm’s litigation department. TRD editor Erik Engquist moderated the discussion.

“The argument that just because this occurred, I don’t have to pay rent, neither one of us see this as a viable argument,” Barrack agreed. To the extent that a contract doesn’t provide specific carveouts for circumstances like force majeure, she continued, “you’re going to have to show something a lot more than just ‘I was in the Times Square area and I was expecting a lot of foot traffic, and now I’m not getting foot traffic.’”

The courts’ protection of contracts is crucial to the business world, she noted.
“Contracts require, and the world requires, certainty in terms of entering into contracts, to be able to rely on what it is the parties agreed to,” she said. “It’s not as if the owner did something that resulted in the shutdown of this business. The owner’s as much in the line of fire from government directives as are the tenants here.”

At the same time, the panelists recognized that even far-fetched appeals to obscure common law doctrines were coming from a place of real economic pain.
“I think you’re seeing a lot of arguments that you might otherwise think of as ridiculous, only because people are struggling,” Mechanic said. “These are difficult times out there.”

Legal rights aside, recognition of the extraordinary economic circumstances has led to many disputes being resolved out of court, the panelists said.
“There are a lot of cases where the tenant comes in and says, ‘My business is being adversely affected, I can’t function the way I functioned,’” Mechanic said. “So what I can do is take my rent for this six-month period and accrue it and pay it back over the next three years when the world opens back up again.”

“The landlord is making a sensible decision and saying look, in this circumstance what I really want is to preserve my tenancy, so I’m going to make a deal that allows them to function in this limited environment,” he continued.
Barrack noted that the limited capacity of courts to handle disputes during the pandemic has also played a role. “There hasn’t been a court system, so people have had to actually try to work things out on their own,” she said. “Many have, many have not.”

Meanwhile, the patchwork response of city, state and federal governments to the pandemic has made it harder for commercial landlords and tenants.
“There’s all these overlays of different laws and dates they’re expiring, and then they’re extended or they’re not, and everyone’s waiting for what’s the next installment, what’s going to happen next,” Barrack said, pointing to a recent city law temporarily suspending the enforcement of personal liability provisions as an example.

At the same time, a crisis of this magnitude does appear to demand a government response for leasing in the future, the lawyers said.
“We will all be better off if we can find some government-sponsored resolution that is akin to TRIA, but for the pandemic,” said Mechanic, referring to the Terrorism Risk Insurance Act implemented after the 9/11 attacks, creating a federal backstop for terrorism insurance. “There’s no easy solution otherwise.”

In the meantime, while landlords and tenants will certainly have pandemics on their mind while entering into new deals, terms are still likely to vary significantly from one contract to the next.
“It’s hard to say that there will be a standard going forward,” Mechanic said. “A lot will depend on the leverage of the parties — how important it is for the landlord to have that tenant in the building, or for the tenant to have that space.”
 

David Goldsmith

All Powerful Moderator
Staff member
Gap must keep paying rent at Times Square flagship: Judge
Ruling blocked landlord from terminating leases for Gap and Old Navy subsidiary, provided they continue paying $3M monthly rent

Among coronavirus-battered retailers, the Gap has been one of the most high-profile proponents of the idea that the pandemic has canceled its rent obligations.
Legal experts have been skeptical, and a judge’s decision this week over rent owed at the Gap’s Times Square flagship store would indicate the courts are, too.
On Wednesday, the judge ordered The Gap and its Old Navy subsidiary to keep paying their landlord nearly $3 million a month in rent at the 60,000-square-foot space that remains closed. The companies must also put up a $5.8 million bond to secure payment of rent arrears from May and June, according to the order.

Last month, the Gap and Old Navy sued the landlord over their pricey leases at the property, the Bow Tie Building at 1530 Broadway. Wednesday’s judgment did grant the companies a preliminary injunction, which blocked the landlord from terminating those leases — but included rent payment and the bond as conditions.

The Gap’s lawyers have argued that it should not be required to pay rent moving forward, “because rent is disputed and tenants are not reaping the benefits of occupancy.” The landlord, meanwhile, pointed to evidence that the Gap was still using the property’s billboard, and still had customers on the premises, to argue it was acting in bad faith.

But as part of her ruling, Judge Debra James provided the companies only a 10-percent reduction in rent, in light of the “extraordinary circumstances” of the global pandemic.
Attorneys with Rosenberg & Estis, who are representing the landlord — a family business now managed by Charles Moss III — view the decision as an absolute win for their client. “In effect, it undermines what [the Gap was] attempting to accomplish by getting away without paying any rent, and trying to leverage that position with the landlord to modify or release them from the lease,” co-founder Warren Estis said.

As one of the earliest decisions in the Gap’s many ongoing rent disputes, this ruling could set the tone for other retail rent lawsuits, he said. “It’s a message that the courts are not going to allow big businesses to push around smaller entities in the hopes of getting a better deal.”

Attorneys for the Gap did not respond to a request for comment. In response to prior inquiries, a Gap spokesperson noted that “our stores are being subject to restrictions that no one foresaw before the closures, much less when the leases were entered.”

“We remain committed to working with our landlords on mutually agreeable solutions and fair rent terms,” the statement continued.
“Ghost town”
The Gap’s Times Square lawsuit employs the same legal strategy as another suit the company filed earlier this month, against a landlord in the Financial District. That suit argued the “purpose of the lease has been completely frustrated” and was effectively terminated in March, because of its forced closure caused by the pandemic.

“In March 2020, everything changed. New York City became a ghost town and overnight, retail activity in New York City came to an abrupt halt,” both lawsuits say.
The Gap’s line of argument put it in the peculiar position of seeking to block the lease termination, while also claiming the lease was already terminated. The judge determined that this was not contradictory because a court has yet to rule on whether the lease was actually terminated.

To bolster its argument that the retailer should keep paying rent, the landlord noted that the Gap raised $2.25 billion in junk bonds in April, further evidence it is “obviously financially able today to meet their leasehold obligation.”
The remaining value of the two Times Square leases, which run through 2030, is valued in the hundreds of millions of dollars.

Both the Times Square and Financial District Gap stores remain closed, according to the company’s store locator website. Many other Gap stores in New York are open for in-store shopping, which has been allowed as of Phase 3 of the city’s reopening.

The Bow Tie Building was previously home to a Toys R Us, and is also home to MacDonald’s new flagship store, which replaced the old flagship a few blocks away at 220 West 42nd Street.
 

David Goldsmith

All Powerful Moderator
Staff member
Tourist hot spot serves landlord a $72K bill
Ellen’s Stardust Diner disputes rent default, claims it is owed money

In late July, Sterling Landlord Corp posted a notice on the front door of Ellen’s Stardust Diner, a Times Square tourist destination known for its singing waiters.
The message was bleak: Ellen’s owed $618,000 in rent and if it did not pay by Aug. 7, the location at 1650 Broadway would be shut down.

But Ellen’s had no plans to pay. Instead, it sued its landlord in New York’s Supreme Court Thursday, disputing the debt and claiming Sterling Landlord Corp owes it $72,000 for the portion of March that the eatery was closed.

According to the lawsuit, the diner has leased the premises since 1992 and signed a new, 10-year lease with Sterling in 2017.
In that lease, both parties agreed that rent payments would cease if the property was damaged in such a way that it was impossible to operate a business there, the lawsuit said.

The pandemic forced many restaurants to close, the suit said; Ellen’s shut its doors March 16, when the statewide ban on indoor dining took effect. Only takeout and delivery were allowed, but many restaurants did not stay open for those services.

“Since the purpose of the lease has been temporarily frustrated due to events beyond the control of the parties, [Ellen’s] does not owe rent,” the suit said.
It questioned the validity of Sterling’s July 16 default notice and asked for a judge to rule that the lease had not been breached and that the landlord had no grounds to terminate it.

What’s more, it said: “Given the casualty event of March 16, 2020, [Ellen’s] is entitled to a rent credit in the amount of $72,580.65 for the overpayment of rent in the month of March 2020.”
Some attorneys consider the “frustration of purpose” argument that many commercial tenants are citing to be a legal long shot.

Terry Havel, vice president of Sterling Landlord and a signatory on the deed of 1650 Broadway, did not respond to requests for comment.
 

David Goldsmith

All Powerful Moderator
Staff member
Banana Republic sues to stay in Rockefeller Center
Retailer says “frustration of purpose” frees it from $791,000 rent

On an average day, Rockefeller Center draws 470,000 visitors. It’s been five months since its last average day, though.
Now Banana Republic is arguing that the purpose of its lease at the famous site has been frustrated, freeing it from the obligation to pay rent.
The national clothing retailer, housed within the International Building, is at risk for a lease termination for skipping out on $791,600 a month in rent. Now the retailer is suing landlord Tishman Speyer to remain on the premises.

In a statement, a representative for Gap, Banana Republic’s parent company, reinforced that the pandemic is placing restrictions on stores that no one foresaw when leases were signed.
“We remain committed to working with our landlords on mutually agreeable solutions and fair rent terms, just as our industry and government partners have sat with us in good faith to shape the post-Covid business landscape,” the statement said.

Tishman Speyer did not respond to requests for comment.
The lawsuit is the latest of many legal spats between Gap and landlords over rent during the pandemic.
Earlier this month, five of Gap’s chains — Gap, Athleta, Banana Republic, Old Navy and Janie & Jack — sued Brookfield Property Partners affiliates, stating that coronavirus restrictions made the core purpose of their leases “illegal, impossible, and impracticable.”

The lawsuits are emblematic of the Covid era, which has left commercial landlords and tenants in uncharted territory. Thousands are renegotiating leases or grappling in court over whether force majeure or frustration of purpose are viable excuses for not paying rent.

Some retailers are aiming to get the same treatment that a restaurateur did in Chicago, where a federal bankruptcy judge reduced Giglio’s State Street Tavern’s rent to just 25 percent from April to June after determining that the circumstances fulfill the criteria for force majeure.
Still, none of the major disputes have been resolved, and lawyers say that a precedent has yet to be set on the issue.
 

David Goldsmith

All Powerful Moderator
Staff member
Delshah sues retailer Free People for $11M after terminating Meatpacking lease
Parent company Urban Outfitters stopped rent payments in March

The list of lawsuits between retail tenants and landlords grows longer by the day. More than demanding a few months in rent arrears, some landlords are now going all out to demand that tenants pay up the full value of their leases.
Michael Shah’s Delshah Capital is one landlord taking that hardline approach against Urban Outfitters subsidiary Free People. Delshah’s retail tenant at 58-60 Ninth Avenue in the Meatpacking District stopped paying rent in the early days of the coronavirus pandemic.

In a lawsuit filed late last month, Delshah says it terminated Free People’s lease on June 10 after the retailer missed two months’ rent. The suit seeks damages equal to back rent plus “all rent that would have been due for the remainder of the lease term” for a total of nearly $11 million.

The 6,800-square-foot Free People lease was set to expire in January 2027 and is worth $1.4 million a year, loan documents show. The property also has three residential units whose total annual rent was $297,600 in 2017.
Although the tenant paid a portion of its arrears in late May, the landlord says that this was not enough to cure the default on the lease. Delshah and Urban Outfitters did not respond to requests for comment.

Free People’s relationship with the landlord had been strained from the start, when Delshah delivered the space to the tenant more than a year later than planned, in the summer of 2016.
Claiming that the delay caused it to miss the 2015 holiday retail season and damaged its reputation and stock price, Free People sought 825 days of rent credit or nearly $3.2 million in damages. A judge eventually ruled that Delshah owed just $650,000 for the delayed delivery.

Delshah acquired the 11,000-square-foot mixed-use building for $18.2 million in 2013. In 2017, the developer secured a $28 million CMBS loan for the property along with another nearby retail building at 69 Gansevoort Street. Delshah sought Covid-19 relief for the loan in April, according to servicer commentary. The loan became more than 30 days delinquent in May but is now current.

Urban Outfitters announced in late March that it would not be paying rent at stores closed due to coronavirus. Urban Outfitters’ Herald Square landlord, Empire State Realty Trust, also sued the retailer last month over $1.2 million in unpaid obligations.

A similar lease termination dispute is playing out at a Gap store in the Financial District, where landlords Crown Acquisitions and Prime Property Fund are seeking to terminate Gap’s lease in a move that could leave the retailer on the hook for more than $60 million in future rent.

In other legal proceedings, Delshah recently secured two money judgments totalling $5.6 million against developer Jack Terzi, in connection with distressed notes on the retail condos at 27 West 72nd Street and 31 East 28th Street. Terzi had earlier accused Delshah of “colluding” with lender Signature Bank to manufacture defaults on the two notes.
Gap landlord defaults on $70M FiDi loan
Retailer hasn’t been paying rent to Crown Acquisitions for Broadway space

Gap’s landlord in the Financial District claims it is in danger of losing its property because the retailer refuses to pay rent.
The Chera family’s Crown Acquisitions is in default on the $70 million mortgage covering the retail condo that houses Gap’s store on Broadway at the corner of Maiden Lane, the landlord revealed in court documents.
Crown, which along with Morgan Stanley owns the retail condo at 170 Broadway, received notice on July 21 from special servicer Midland Loan Services that it was in default after failing to make the May mortgage payment.

Crown is now “subject to possible foreclosure — and the irreparable harm of losing” the property, Brittany Bragg, the COO, wrote in a court filing.

Representatives for Crown and Gap did not immediately respond to requests for comment.
Crown said it had requested relief on its mortgage, but did not get it. A representative for Midland did not immediately respond to a request for comment.

Last month, Midland noted in its commentary on the loan that Covid-related relief for the property was cancelled “due to lack of additional information provided to process the request.”
Gap sued Crown in July, asking the court to rule the lease terminated when stores were forced to shut down in mid-March.

But Crown argued that the Gap’s store had been underperforming for years before the coronavirus hit, and the retailer had long sought to leave the Broadway space. Crown called the lawsuit “simply an unconscionable ruse” by Gap to get out of its deal.

Gap declared in April that it would stop paying rent at all of its shuttered stores. It has since gotten into several legal confrontations with its landlords.
 

David Goldsmith

All Powerful Moderator
Staff member
Brookfield’s nixed mall redevelopment may signal strategy shift
Real estate giant entered Vermont project in 2017 with plans for apartments, office tower

A tough economic environment has led Brookfield Property Partners to cancel plans to redevelop a mall in Burlington, Vermont, and local officials aren’t happy.
Brookfield became involved in the project in 2017, with plans to build apartments and a 10-story office tower on the now-empty site. But last month, it sold its interest in the project to local partner Devonwood Investors.
“We made a lot of progress over the past three years, completing the assembly of the site and progressing approvals,” a Brookfield spokeswoman told the Wall Street Journal, “but the long-term nature of the next phase of this development doesn’t fit with our funds mandate.”
Burlington Mayor Miro Weinberger criticized the investment giant’s decision to pull out without bringing a new partner to replace it, calling it “a breach of faith and a betrayal of trust.” The city issued a letter of default to Brookfield on July 22 and plans to pursue damages.

“They understand that their reputation is at stake here,” Weinberger said. Brookfield says that its development agreement allowed it to sell its interest, but the city disagrees.
In a 2018 investor presentation, Brookfield named the Burlington project as an example of its strategy of transforming struggling malls by shrinking the retail footprint and adding office and residential uses.

But analysts say Brookfield’s redevelopment strategy may not be feasible in the current economic environment.
“Tenants are likely slower to take up space now,” said Alexander Goldfarb, a senior research analyst at Piper Sandler Cos. “There is no rush to complete a new hotel or add new restaurants.”

Brookfield is continuing its mixed-use redevelopment of the Stonestown Galleria in San Francisco, and counts Manhattan’s Brookfield Place among its prior mixed-use successes.
 

David Goldsmith

All Powerful Moderator
Staff member
Simon strikes back at the Gap with $107M lawsuit
Mall operator accuses retailer of “taking opportunistic advantage” of pandemic to avoid payment

Call it a retail rumble, with Simon Property Group in one corner and its largest national tenant in the other.
The largest shopping mall landlord has filed another lawsuit against the Gap. This one accuses the retailer of “taking opportunistic advantage” of the pandemic to avoid paying $107 million in overdue rent, even though some of its stores have reopened, Bloomberg reported.

In June, Simon sued the Gap, saying it owed $66 million in rent. The Gap followed that up with its own suit seeking rent relief.
Since the pandemic forced retailers across the country to close, there have been a slew of lawsuits between tenants and landlords over unpaid rent. In addition to the dispute with Simon, Gap is also involved in litigation with Brookfield Properties and other landlords.

With restrictions now loosening across the country, several Gap stores have reopened, but the company said it is still struggling in many areas.
“We remain committed to working with our landlords on mutually agreeable solutions and fair rent terms,” a representative for the Gap told Bloomberg, “just as our industry and government partners have sat with us in good faith to shape the post-Covid business landscape.”

In its counterclaim, Simon said Gap “has ample financial resources to meet its contractual obligations” but its “executive leadership made a calculated and strategic decision not to do so.”
“The Gap’s re-openings were highly selective and strategic,” the suit said. “They had more to do with The Gap’s business objectives and implementation of its new business plans than they did with any legitimate Covid-19 concerns or temporary disruptions.”
 
Top