Within the past week, landlords have filed lawsuits against two of the country’s biggest retailers over missed rent payments.
With majority of their stores still closed to the public, Gap Inc. and Ross Stores Inc. joined the growing roster of retailers — counting Nordstrom, H&M and Burlington Stores — that have skipped out on their lease obligations as the coronavirus pandemic throws their balance sheets into disarray. The move has left commercial landlords with little options — leaving some to take legal action against their shuttered tenants in order to meet their own mortgage terms.
Under the CARES Act, companies are able to apply for forgivable loans so long as the funds they receive from the government are used to pay qualified expenses for an eight-week period. However, the rent deferment policy requires businesses to use 75% of their loans to fund payroll, leaving only 25% for operating expenses — including rent. Landlords and tenants must then work out a deferral agreement or settle on a waiver that ensures the latter will not be disqualified for loan forgiveness by putting more than a quarter of its bailout funds toward rent.
According to fashion law attorney and brand consultant Elizabeth Kurpis, payment obligations for commercial tenants generally rest on the language of their leases with their landlords — and thus need to be assessed through a line-by-line analysis of such provisions.
“Many [leases] include a negative covenant which prohibits tenants from going dark for extended periods of time, which, as we know, is currently happening everywhere and would put tenants in direct default,” she explained. “However, tenants are also generally required under their leases to comply with all applicable laws. Given the stay-at-home orders and other government restrictions on businesses at the moment, tenants may be able to argue that they are forced to violate these covenants in order to comply with applicable laws and are therefore not in breach.”
Many commercial leases contain a force majeure clause, which essentially frees both parties from certain obligations caused by circumstances beyond their control, including wars, strikes or, in some cases, pandemics and other similar unforeseen events.
As COVID-19 makes its way throughout the country, even more retail tenants might seek rental concessions from their landlords. Landlords, on the other hand, will continue to keep top of mind their cash flow management and equity arrangements that may need third-party consent before entering into any relief agreements.
Mall owner Macerich, for instance, has begun to reopen some of its malls, but only a fourth of its retail tenants are paying rent. While the “vast majority” of its leases do not abate tenants’ payment obligations, the real estate giant acknowledged the unprecedented nature of the health crisis and said it was currently working to address rent collections with store owners on a “tenant-by-tenant basis.”
Meanwhile, 48th Americas LLC filed a complaint last Monday against Gap Inc., alleging that the specialty retailer violated its lease agreement by failing to make fixed and other rent payments totaling more than $530,000. It claimed that Gap missed two monthly rent payments of roughly $264,000 (on top of water and snow removal charges), and the landlord is seeking monetary relief for the skipped payments as well as at least $20,000 to cover attorneys’ fees.
A day later, Palm Springs Mile Associates Ltd. sued Ross Stores Inc. in Florida district court. The landlord said that the off-price chain owed $5.5 million in unpaid rent on three of its stores in the state. According to the complaint, Ross Stores opted against paying rent that was due May 1 and “has further advised that its non-payment of rent will continue.” However, under the terms of its leasing agreements, Palm Springs Mile Associates said that the retailer is still “obligated to pay rent and that obligation is not excused.”
Before going to court amid a pandemic, some experts suggest that landlords should consider other options: rent reductions or deferrals; rent abatements, where it forgives a certain amount that is past due; apply loan conversions, which converts payments into loans; or apply tenants’ deposits against their rent.
“Of course, none of these options are ideal — particularly for the landlords and those financing these deals — but consider the alternative: Chasing money that isn’t there or dumping more money and time down the drain litigating the issues,” Kurpis said. “At the end of the day, landlords can’t squeeze blood from a rock, so it really is in their best interest to resolve these issues as amicably as possible and with full understanding — as much as one can — of the current rental market.”
— Additional reporting by Ella Chochrek