Simon Property Group raised eyebrows in the real estate and retail communities this week with the filing a suit that challenged Starbucks’ decision to close 78 Teavana stores in Simon malls. All retailer 379 of the tea shops are slated for closure through next year.
But Simon’s suit contends that, in so doing, Starbuck’s would be “shirking its contractual obligations at the expense of Simon’s shopping centers.” It’s a case with the potential to set precedents in how “covenants to operate” are executed and enforced in retail leases, according to one lawyer.
“Simon may be looking for a settlement, or they may be looking to create some good case law: ‘You violated your covenant to operate and you have to operate,’” said Dana Kreis Glencer, a commercial leasing specialist at the firm of Dawda Mann in Bloomfield Hills, Michigan.
Glencer explained that one of the things that a retailer could have done in this situation would have been to approach Simon ahead of its closure announcement and attempt to work out a settlement in advance. Starbucks, she added, might not have done so out of concern that such a move would create a sense of insecurity around the brand in the marketplace.
That appears to be part of the motivation behind Simon’s suit. In announcing the Teavana shutdown, Starbucks CEO Kevin Johnson laid the blame on declining mall traffic, a comment intended to “deflect blame from itself and avoid adverse investor reaction,” said the suit filed on behalf of Simon by the Indianapolis office of the law firm Barnes & Thornburg LLP.
With so many retail chains closing stores, it’s possible Simon used the Teavana shutdown to draw a line in the sand. “Simon is probably taking the approach that, if we don’t take a stance and oppose the closure, other tenants who may have a failing or less than profitable retail store might say, ‘Well, we’re going to close our stores like Teavana did since Simon will not likely enforce our covenant to operate.’”
The suit maintains that Simon is willing and able to deal in a fair manner with store closures, “but only if tenants fulfill their covenants and operate continuously during the term of their leases. Tenants that do not live up to their continuous operation obligations cause great upheaval for both Simon and their fellow tenants.”
National Retail Tenants Association President Paul Kinney called the situation “very unusual.”
“Most leases will have provisions for going dark. You can’t just close the store. If you do, the landlord can go in and pick up all the rent until the end of the term,” Kinney said. “It looks like Starbucks made the decision to do whatever they want to do.”
According to Simon, only two Teavana leases expire in the coming year. The remaining 76 extend out as far as 2027.