Legal Corner | April 2021

Editor’s Note: Legal Corner contains case summaries and analysis of recent court decisions that impact retail leasing and lease administration. These summaries focus on the leasing issues covered in each case and do not include detailed discussions or analysis of the procedural and peripheral issues in the cases.

IN THIS ISSUE: —Abercrombie and Fitch Stores, Inc. v. Simon Property Group, L.P., COURT OF APPEALS OF INDIANA, 2020 160 N.E.3d 1103 (Nov. 25, 2020) —Trustees of Columbia University in City of New York v. D’Agostino Supermarkets, Inc., COURT OF APPEALS OF NEW YORK, 2020 N.Y. SLIP OP. 06937,  N.Y.3d 69 (Nov. 24, 2020)

Was injunctive relief an appropriate remedy when a retailer shuttered 53 stores during the pandemic?

—Abercrombie and Fitch Stores, Inc. v. Simon Property Group, L.P., COURT OF APPEALS OF INDIANA, 2020 160 N.E.3d 1103 (Nov. 25, 2020)

In February, 2019, a clothing retailer (“Retailer”) and mall property owner (“Owner”) began negotiating an agreement (the “Agreement”) to set terms for 54 leases including extensions of leases expiring before January 31, 2020, relocations, and resolution of a rent dispute. In a series of emails in January, 2020, Retailer’s representative sent Owner’s representative the “major points” to be included in the Agreement and Retailer’s attorney also confirmed that the terms included all “major points” to be included. Those “major points” included that Retailer would pay Owner approximately $450,000 less rent per month for the group of stores and that Retailer would close 5 stores. After the parties’ attorneys confirmed that a “bunch of deals [had been] approved” and that they would begin to draft leases, Retailer’s attorney received a draft lease from Owner’s attorney and confirmed that an “agreement [was] reached between [the parties and] documented in [the January 14] email”. While the parties continued to negotiate the Agreement, Retailer operated in accordance with the “major points” by paying the reduced rent, occupying the stores whose leases were to have expired on January 31, 2020, and closing 5 of its stores.

On March 10, 2020, Retailer’s attorney encouraged Owner’s attorney to execute negotiated lease documents. On March 13th, Retailer sent executed lease amendments with original signatures to Owner for 42 of the 54 stores that were subject to the Agreement.

Due to the COVID-19 pandemic (the “Pandemic”), Retailer closed all of its stores on March 16, 2020. One day later, Owner began sending electronically signed copies of the lease amendments to Retailer by email. On March 18th, Owner announced it would close all of its malls as a result of the Pandemic and on the same day Retailer sent a letter to Owner retracting signatures on the 42 lease amendments it previously sent to Owner based on “the current uncertainty regarding the impact of COVID-19” and stated that the Agreement, which was never executed by Retailer, “shall be of no further force or effect”. On March 27, Retailer sent notices of termination to each of the landlords where leases expired before January 31, 2020.

Owner filed a complaint against Retailer seeking a declaratory judgment that the Agreement was valid and enforceable and seeking damages for specific performance for the Retailer’s breach of the Agreement. Retailer then made it clear that it intended to permanently close and abandon all 54 stores that were the subject of the Agreement. In response, Owner sought a temporary restraining order and a preliminary injunction to prohibit Retailer form permanently closing its stores.

The trial court granted Owner’s motion stating, among other things, that Owner established that there was an enforceable Agreement and the sudden closures would cause Owner irreparable harm. The court’s order enjoined Retailer from (1) removing inventory, fixtures and equipment from the stores for the purpose of closing them, but allowed some inventory movement to other stores or for online sales, and (2) abandoning the stores and requiring Retailer to operate per the terms of the leases drafted pursuant to the terms of the Agreement thereby maintaining status quo

On appeal, Retailer argued that for the purpose of maintaining status quo, the trial court should have considered the status quo on March 17th (during Retailer’s closure due to the Pandemic), not the status quo prior to Retailer closing stores as a result of the Pandemic and as a result of considering status quo on the wrong date, the trial court compelled Retailer to engage in activity (reopen 50 stores that it had already closed) that it was not then doing. The appellate court stated the logic used by Retailer mischaracterized the issue before the trial court which was Retailer’s threat to permanently close and abandon stores based on the theory that there was no binding contract between Owner and Retailer (the issue had nothing to do with temporary government-ordered closures). The appellate court reasoned that the temporary injunction did not cause Retailer to reopen in defiance of government orders and that instead it prohibited Retailer from permanently closing.

In addition, Retailer contended that the trial court abused its discretion by granting an injunction because Owner did not show that it would prevail on the merits of the case at trial. The appellate court found that Owner presented evidence that it had a reasonable likelihood of success at trial for multiple reasons. First, not every term to an agreement must be finalized for a contract to be enforceable, the parties must only agree on essential terms to render an agreement enforceable. The court found it persuasive that the parties made statements that they had reached agreements, prepared and finalized lease documents, approved drafts of the rent-dispute settlement, and Retailer executed leases. Second, performance under an agreement amounts to an admission that a contract existed. Retailer performed pursuant to the major points outlined in the January emails by keeping stores open after January 31, 2020, paying reduced rent and proceeding with store relocation and closure plans.

Retailer also argued that the injunction was not appropriate because Owner failed to show irreparable harm in the absence of an injunction. The appellate court determined that Retailer being able to make the remaining payments under its leases would not constitute a complete remedy for Owner. In making this judgement the court considered testimony from an expert that (1) sudden closures would have a harmful effect on Owner and other tenants by suggesting that the shopping center was in trouble; (2) sudden closures would impose stress on Owner to retain and attract tenants; and (3) a customer returning to a mall after a pandemic will have a negative response if nationally recognized stores are no longer in the mall post-pandemic. The expert explained that damages to Owner would be beyond what could be remedied by Retailer’s payment of the remaining rent under the leases and that the Owner will experience a battle to adjust to operation because of Pandemic related concerns.

 

Should a liquidated damages clause in a lease surrender agreement be evaluated against the lease or the surrender agreement?

—Trustees of Columbia University in City of New York v. D’Agostino Supermarkets, Inc., COURT OF APPEALS OF NEW YORK, 2020 N.Y. SLIP OP. 06937,  N.Y.3d 69 (Nov. 24, 2020)

A university (“University”) entered into a 15 year lease with a supermarket (“Supermarket”). In year 13, the Supermarket was facing financial difficulties and the parties entered into a surrender agreement (the “Surrender Agreement”) which terminated the lease in exchange for Supermarket making a payment totaling $261,751.73 (the “Surrender Payment”) to University. The Surrender Agreement divided the Surrender Payment into multiple installments and required that Supermarket pay University $43,000 upon execution of the Surrender Agreement, an additional $43,000 prior to June 1, 2016 and then payments of $15,997.43 on the 1st day of each month during the period commencing on July 1, 2016 and ending and including on May 1, 2017. Pursuant to the Surrender Agreement, if Tenant defaults in making payments, the aggregate amount of “all Fixed Rent, additional rent and other sums and charges due and payable during the term of the Lease shall immediately and thereafter come due and payable by Tenant to Landlord...”

Supermarket vacated and made the two $43,000 payments to University but did not pay the $15,997.43 payments due on the first of July, August, September, and October 2016. In November, 2016, University commenced an action to enforce the damages provision of the Surrender Agreement and moved for summary judgment seeking future payments under the terminated Lease totaling $1,020,125.15. In December, 2020, Supermarket tendered $175,751.73 to University representing the remainder of the Surrender Payment and accrued interest as of October 14, 2016. University rejected the tender. Supermarket then moved for summary judgment striking the damages provision of the Surrender Agreement and seeking a judgment in the amount of $175,751.73. Trial court granted Supermarket’s motions.

University’s argument on appeal was that since the Surrender Agreement was a resolution of Supermarket’s breach of its lease, damages should be measured against what Supermarket owed under the breached lease. Supermarket’s position was that University’s actual damages for Supermarket’s failure to timely make payments under the Surrender Agreement was calculable, the liquidated damages provision of the Surrender Agreement amounted to a more than 2000% per annum late fee for failure to timely pay monthly installments under the Surrender Agreement, and was grossly excessive.

The court held in favor of Supermarket reasoning that the contractual breach at issue is overdue payment of installments of the Surrender Payment and therefore damages should be measured against the Surrender Agreement and not against the terminated lease. The court held that the liquidated damages clause of the Surrender Agreement was “plainly disproportionate to the damages” for the breach of contract at issue.

In its analysis, the court discussed that in the event of a default by Supermarket under the lease, University could avail itself of specific remedies, however, instead of availing itself of those remedies or suing for a breach of the lease, Supermarket and University entered into the Surrender Agreement which constituted a new contract that terminated the lease and relieved Supermarket of its lease obligations in exchange for the Surrender Payment. The Surrender Agreement contained a liquidated damages provision. The court explained that liquidated damages are “an estimate, made by the parties at the time they enter into their agreement, of the extent of the injury that would be sustained as a result of breach of the agreement”.

Since the Supermarket was seeking to avoid payment of liquidated damages, it had to establish that the damages for breach of the Surrender Agreement were a penalty and disproportionate to foreseeable losses. Since the liquidated damages provision requires payment of an amount more than seven times the amount due if Supermarket fully complied with the Surrender Agreement, the court held that it could not enforce the “grossly disproportionate award without offending [the] State’s public policy against ‘the imposition of penalties or forfeitures for which there is no statutory authority’”.

Cristina L Addy, an attorney in the Real Estate Group at Goulson & Storrs, is a regular contributor to the NRTA Legal Corner.