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In a Retail Storm, Mall Owners Seek Refuge in the Courts

Posted by Yijy8kNUMO on December 12, 2017

When all else fails, sue.

Decades of overbuilding have saddled property markets with too many malls even as online shopping and changing consumer preferences are reshaping the retail sector. Now landlords, tenants and investors are looking to the courts for relief.

Friction between landlords and tenants usually centers on clauses that allow retailers to receive rent concessions if certain anchor tenants leave the mall or if occupancy levels fall below a certain threshold.

A recent court ruling granting a preliminary injunction to prevent Starbucks Corp. from closing Teavana stores in 77 retail locations owned by mall landlord Simon Property Group Inc. is causing more tenants to scrutinize their lease contracts as concerns mount that they could end up in the same boat.

Some tenants, alarmed by the injunction, are demanding kick-out clauses in their lease contracts that allow them to terminate early, said Corey Bialow, chief executive at Bialow Real Estate LLC, a firm that represents retail tenants.

Typically damages are awarded when a lease contract is breached, so a demand for a court order to halt tea stores from closing suggests that even the largest malls are more vulnerable than their owners let on.

The court filings show that the landlord’s fear is that the departure of Teavana could result in a retail version of a bank run.

“Each premature closure is viewed by tenants as an indication of a larger possible problem with the mall retail environment and emboldens other tenants to approach Simon and ask to close some or all of their stores,” according to court documents quoting testimony by Bruce Tobin, Simon’s senior executive vice president of leasing-malls. Simon didn’t respond to requests for additional comment. Starbucks didn’t respond to requests for comment, but has said it was disappointed by the ruling.

“If an anchor store like Apple is ordered to stay open in a mall, that makes sense since the store is a major traffic driver. But this is a tea store. No mall is dependent on a tea shop,” Mr. Bialow said.

The growing uncertainty over occupancy and leasing success in malls, strip centers and other retail properties is also driving disputes between lenders and landlords.

In particular, some owners of properties that are more highly leveraged and funded with riskier “mezzanine” debt face a greater threat of their property getting repossessed by the mezzanine lenders if the owners are unable to meet their debt obligations.

 “We’re seeing that in property bought more recently,” said Jennifer Recine, a partner at law firm Kasowitz Benson Torres LLP. “The new owner could lose the property.”

Activist investors also have been circling mall real-estate investment trusts, whose share prices have been sliding for the past year. When activists swoop in, executives from the targeted company often engage counsel to ward then off.

Taubman Centers Inc. already has spent roughly $12 million in legal and advisory services fees in the first nine months this year on activities related to a shareholder activist campaign launched by Jonathan Litt. It might have to set aside more resources, because Paul Singer’s Elliott Management, another firm known for agitating for change, recently took a stake in the luxury mall operator. Taubman and Elliott declined to comment. Mr. Litt didn’t respond to requests for comment.

Taubman also recently filed a lawsuit against Saks Fifth Avenue in Puerto Rico in October, alleging that the retailer is dragging its feet in repairing the store after damages from Hurricane Maria.

Hudson Bay Co., the owner of Saks Fifth Avenue, has denied the allegations. Taubman, the Bloomfield Hills, Mich.-based real-estate investment trust, declined to comment.

Source: The Wall Street Journal,  December 12, 2017 12:17pm

Author: Esther Fung

Image Credit: Mark Wilson/Getty Images

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