Landlords increasingly turn to lawsuits against nonpaying retailers
As dues enter into millions, lawsuits are flooding in
UPDATED, Feb. 5 2021, 3:55 p.m.: It’s been nearly a year since the start of the pandemic — and for some retailers, that means it’s been nearly a year since they’ve paid rent.
Take L’Occitane, the French beauty brand. On March 25, 2020, the company told one of its landlords, Simon Property Group, that it would stop paying rent at its locations for “as long as the crisis continues,” starting in April. It then halted rent payments at 40 of its stores.
As a result, L’Occitane owes the mall landlord $3.7 million. Now, Simon is taking its tenant to court: The landlord filed a complaint last week in New York State Supreme Court, threatening legal action if L’Occitane doesn’t pay.
“Our companies have had a long-standing, productive and positive relationship, and it is disappointing that you have forced us to be in this position,” the complaint reads. (Simon previously sued other nonpaying clients, including Gap and Eddie Bauer.)
Simon isn’t alone. Retail rent collections for national tenants have largely stabilized from the early days of the pandemic, returning to 90 percent at the end of 2020. But as the health crisis drags on and some brands remain woefully behind on rent, landlords are increasingly turning to lawsuits to force their hand — and more are likely to come as the pandemic approaches the one-year mark.
According to Risa Letowsky, the chair of Duval & Stachenfeld Leasing Practice, these lawsuits are more likely to be filed by smaller landlords with less cash flow than larger firms like Simon and other giants of the retail sector.
Institutional landlords have “done a really good job in working with the tenants to keep them afloat during this time,” she said.
“While I think we’re going to see a lot of lawsuits that are backed up that have been sitting there and ones that are going to be brought, I don’t know that it’s going to be a lot of the players that we typically see in the news here in New York City,” Letowsky added.
At 537 Broadway in Soho, for example, Guess has failed to pay over $200,000 per month, plus utilities and real estate taxes, since last April. It’s now accrued $1.4 million in missed payments, and the landlord, Castiron Court, is suing the clothing company.
“Our clients are renowned artists and distinguished art foundations who leased this exceptional space to Guess fully expecting Guess to abide by its obligations,” attorney Terrence Oved of Oved & Oved, which is representing the landlord, said in a statement. “When it became clear that Guess was unwilling to continue doing so, we commenced this action to compel Guess to do litigiously what it would not do honorably.”
Larger landlords have also pursued legal action. At the Time Warner Center in Midtown Manhattan, Related Companies sued six of its retail tenants for a total of $7.5 million in unpaid rent. The individual suits were filed against Hugo Boss for $4.2 million, the Running Specialty Group for $1.05 million, Cole Haan for $920,813, Michael Kors for $774,880, Tumi Stores for $241,003 and Fairway LLC for $291,438.62.
And Petco is being sued for outstanding rent in several locations. Those include 31-33 Second Avenue in New York, where it is behind by almost $185,000, and at two Miami-Dade shopping centers, where it allegedly owes $62,269, according to two separate lawsuits. Petco declined to comment on pending litigation.
Some retail tenants believe that the pandemic’s impact on their ability to do business allows force majeure clauses — a part of the lease stipulating that unforeseeable circumstances prevent a company from fulfilling a contract — to come into play. If judges rule in their favor, it could lead to voided leases and millions of dollars of unpaid rent.
But landlords argue that in many parts of the country, stores are able to operate with few restrictions, meaning it’s time to pony up.
Landlords are also met with various challenges that can make legal action seem like the best course of action. In New York, there are competing versions of a commercial eviction ban — one from Gov. Andrew Cuomo, and one from the state legislature — that would prohibit landlords from evicting tenants for nonpayment through May.
The suspension of the enforcement of personal liability provisions, meanwhile, gives landlords little recourse to receive the rent that they’re owed.
Nonpaying retailers, meanwhile, are “riding it out,” according to Jeffrey Goldman, co-managing partner at Belkin Burden Goldman.
“They’re hoping that, maybe an owner who’s desperate — six months, a year, a year and a half or two years later — they’ll take 50 cents on the dollar,” Goldman said.
Not all tenants who are behind on rent are trying to game the system, and store owners and their landlords are still trying to work out plans. “I don’t know a single owner who is not working it out with their tenants,” said Paimaan Lodhi, the Real Estate Board of New York’s senior vice president of policy and planning. “It behooves no one to have a vacancy right now.”
For its part, REBNY is pushing for federal financial assistance for landlords and tenants.
“The level of relief that is being sought here can only be addressed by the federal government,” Lodhi said. “The problem is just that big.”
CORRECTION: This story originally erroneously cited data from HUD about business entity landlords, which has since been removed.