As shopping malls struggle with declining sales and increasing vacancy rates, one of the nation’s largest mall operators, Simon Property Group, has gotten creative to stem the tide of store closures. Simon filed suit last year against Starbucks over its plan to close all retail locations for its Teavana brand of high-end specialty teas. In the suit, Simon requested a preliminary injunction to prevent Starbucks from closing seventy-seven stores located within Simon-operated properties citing a “continuous operation covenant” contained in its leases.
In November 2017, an Indiana Superior Court judge took the unprecedented step of granting a nationwide preliminary injunction that bars Starbucks from closing stores within any Simon properties while the litigation proceeded. ((Simon Property Group, L.P. v. Starbucks Corp., 2017 WL 6452028, at *2 (Ind. Super.).)) The ruling amounted to a successful culmination of Simon’s recent attempts to give more teeth to “continuously operate” provisions contained in many leases. ((See Simon Property Group, L.P. v. Wolverine World Wide Inc., Case No. 49D01-1612-PL-043000; Simon Property Group, L.P. v. Kenneth Cole Consumer Direct, LLC, Case No. 49D01-1612-PL-043144 (holding that harm to Simon given its strong financial position was not as strong as the harm from forcing the struggling retailers to continue operations of stores).))
As a condition of the lease, such a provision specifies how store owners must operate their retail locations. The specific language in question required that Teavana stores maintain minimum hours of operation, adequate inventory, and staffing for the full term of the lease. The lease also stated that specific performance was the preferred remedy for a breach of the provision, so Simon theoretically could force Starbucks to operate the Teavana locations until the leases expired. ((Simon v. Starbucks, 2017 WL 645202, at *4.)) Since Starbucks conceded that closing the locations would be a breach of its leases, the court was left “to determine whether Starbucks’ actions with respect to closing its 77 Teavana retail stores constitute such irreparable harm for which no legal remedy would be adequate to compensate Simon [once the closures took place], the standard for a preliminary injunction.” ((Id. at *16.))
Starbucks argued that such a nationwide injunction against a non-anchor store would be unprecedented and that a recovery of remaining rent and incidental costs would fully compensate Simon. ((Id. at *18.)) Simon, on the other hand, argued that such a large number of vacancies would be difficult to fill in today’s retail climate and that such vacancies would decrease foot traffic and create a negative image that risked contagion resulting in more closures. ((Id.)) Furthermore, Simon argued that if a “financially secure organization such as Starbucks can unilaterally decide to remove itself from Simon’s malls early in spite of any Continuous Operation Covenants, then any Simon tenant would be able to prematurely leave without any concern that a court may compel them to specifically perform the terms of the lease.” ((Id.))
In her ruling, the judge cited that difficulty in calculating the true economic harm from closing to Simon’s future business in her decision to grant an injunction. ((Id., at *19.)) She reasoned that the sheer number of properties affected meant that even though each location was small, the aggregate effect on Simon was equivalent to the closure of a much larger anchor store. ((Id.))
A subsequent appeal of the decision to the Indiana Supreme Court was abandoned when Starbucks and Simon reached an undisclosed settlement in January 2018 that allows the Teavana locations to be shuttered. ((Andrew McIntyre, Simon-Starbucks Case May Give Landlords a Legal Roadmap, Law360, (Jan. 19, 2018), https://www.law360.com/articles/1002744/simon-starbucks-case-may-give-landlords-a-legal-roadmap.))
Although some worried that the decision could have broad implications for other struggling retailers, ((Lisa Fickenscher, Judge bars Starbucks from closing 77 failing Teavana stores, N. Y. Post, (Dec. 1, 2017), https://nypost.com/2017/12/01/judge-bars-starbucks-from-closing-77-failing-teavana-stores/.)) in reality the decision is likely fairly cabined to the facts of the case. Unlike the majority of retailers who engage in mass store closures, Starbucks remains a highly profitable business. ((Simon v. Starbucks, 2017 WL 6452028, at *7.)) Although some losses from continued operations of Teavana locations is inevitable, the effect on the company as a whole should be minimal. ((Id. at *11.)) This was a factor that the judge explicitly weighed when considering the injunction. ((Id. at *22.)) Consequently, it seems unlikely the precedent will have any effect on retailers undergoing a bankruptcy restructuring.
The decision, however, will likely cause landlords and tenants to more carefully negotiate continuous operations provisions in the future now that there is a greater prospect that the terms will be enforced, even if only under specific conditions. ((See McIntyre, supra note 10.))
“I think it’s critical that Simon did this, not only for themselves, but for the broader community of landlords out there that have retail assets,” Peter Breckheimer of Glaser Weil Fink Howard Avchen & Shapiro LLP told Law360.
“These types of provisions do exist in a lot of leases, and . . . they had really never been tested in the courts . . . Simon did other retail landlords a substantial service in carrying this case forward,” Breckheimer said. ((Id.))
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