Large-Scale Lease Disputes Hit Major Retailers

Originally published by Jeff Raizner.

As COVID-19 continues to affect businesses, the landlords of major retailers are suffering due to unpaid rent. Commercial landlords and tenants have been busy trying to work out rent forbearance, deferrals, and other lease modifications – but some of these efforts are now hitting a roadblock. An increasing and alarming trend is developing as some major national retailers attempt to extract lease modifications from both institutional and non-institutional landlords. In most of these circumstances, commercial property owners are typically much smaller operations than the major brands they lease to, like Starbucks. In effect, some national retailers and other large commercial tenants are demanding a bail out from small and mid-sized commercial property owners.

Brand Names Seeking Rent Relief During COVID-19

Though many small businesses have sought rent relief during the COVID-19 pandemic, you may be surprised to learn that major brand names have also made similar requests of their landlords. Recent litigation regarding large-scale lease disputes involves major retailers like Gap, Ross Stores, AMC Theaters, and Starbucks.

As large retailers face plunging sales and employee layoffs, they are trying to renegotiate their leases, even refusing to pay at all in some instances. This has ultimately given rise to legal troubles with landlords, who are also trying to protect themselves in a climate with rising vacancies and falling rental income that threatens their own survival.

Simon Property Group – the largest mall retailer in the United States – has sued Gap for $66 million in unpaid rent from retailers including Old Navy and Banana Republic spanning nearly three months. In instances like these, landlords claim retailers are taking advantage of the pandemic in order to decrease their rent; however, despite the coronavirus woes many smaller businesses face, large retail tenants are more likely to have the financial wherewithal to pay their rent.

While you may assume the landlords leasing space to these large chains have billions of dollars in assets, many commercial property owners are small businesses and even individual real estate investors who are suffering due to lapses in rent. Luxury goods conglomerate LVMH – which is comprised of companies like Sephora and Starbucks – had $2.6 billion in cash on hand at the end of March and stocks and bonds it could have easily sold to raise more money; but, its entities have also stopped paying rent. In another instance, massive coffee chain Starbucks demanded rent relief from its landlords for an entire year despite having $6 billion in revenue during the second quarter of 2020.

The Problem for Landlords

It’s important to keep in mind that – unlike Simon Property Group – not all landlords operate on a large scale. In fact, many strip centers and malls are actually owned by small and mid-sized businesses with much fewer resources than their major retailer tenants. Landlords for hotels, restaurant chains and retailers in particular have been hit hardest by COVID-19, with tenants falling behind on rent payments. In turn, landlords have begun to fall behind on the loans used to acquire and/or build future properties.

Leases and Force Majeure

A force majeure clause is triggered by an unforeseeable or unavoidable event beyond the reasonable control of the parties to an agreement that works as an excuse or delay in the performance of their obligations under the contract. If applicable, force majeure could ultimately excuse the nonperformance of contractual obligations because of specified events, which can include floods, fires, earthquakes, wars, terrorist attacks, and government orders, among others.

Disputes regarding the application and validity of force majeure clauses begin with interpreting the specific language used in the lease itself. Most clauses specify that they can only be invoked when performance becomes impossible. A force majeure clause in a lease can:

• List specific events that trigger its application,
• Vaguely refer to ‘anything out of the parties’ control,‘ or
• Define specific events and include broader catchall language.

With regard to COVID-19, though many leases contain force majeure clauses, they typically won’t excuse commercial tenants from rent payments due to viral outbreaks or pandemics. This makes it incredibly unlikely a large company will be able to invoke a force majeure clause due to stay-at-home orders.

Houston Commercial Property Damage Attorneys

Large, brand name corporations seeking to freeze or delay rent payments ultimately leaves their much smaller landlords operating without a safety net. At Raizner Law, we worked with business owners and landlords to protect their livelihoods from property damage disputes. If a large tenant is not paying rent for space in your commercial property, and they owe you hundreds of thousands of dollars in unpaid rent, the attorneys at Raizner Law can help. Contact us today to see how we can assist you.

The post Large-Scale Lease Disputes Hit Major Retailers appeared first on Raizner Slania LLP.

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