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 Garcia 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.”
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