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Shopping Centers Today -> June 2002
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JUDGE ORDERS THE LIMITED TO KEEP MALL STORES OPEN
By Jo Ellen Meyers Sharp
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| Glendale Shopping Center, Indianapolis, won a rare court ruling. |
What started as a gift-buying trip for his wife ended up with John Kite on the witness stand, testifying for the life of his shopping center.
The result was a court order that bolstered landlord rights and may bring about a re-examination of lease provisions by tenants and owners.
In early April Kite was shopping at The Limited at Glendale Shopping Center, Indianapolis, when he noticed the inventory was down. He asked a clerk if the store would be getting new stock. The clerk said no and that the store was closing by the end of the week.
Kite, president of Indianapolis developer Kite Cos., which is part owner of Glendale Shopping Center, learned that store employees planned to be on the property after hours to make what the mall owner saw as a “midnight run” and close Limited, Bath & Body Works, Express and Victoria’s Secret. Not so fast, said Judge Gerald S. Zore of Marion County Superior Court, who ordered the stores to stay open until Limited and Kite Cos. could hash out rent owed, co-tenancy provisions and other matters in court.
“The ruling is quite significant,” said Georgette Chapman Poindexter, professor of real estate law at the Wharton School of Business at the University of Pennsylvania. “What usually happens is the tenant goes dark but continues to pay rent.”
In finding for the mall’s owner, Glendale Centre, of which Kite Cos. is 50 percent owner, Zore said the injunction preserves the status quo. The four shops, which occupy 25,223 square feet, are “key tenants” whose closing “creates particular hardships” for the center, he said. Among the hardships he cited were the dropping of mall occupancy levels to below contractual agreements with other retailers; the difficulty of finding tenants when vacancies occur before a lease expires; build-out expenses for new tenants; and impairment of Glendale’s ability to maintain or receive financing. “The harms…may cause catastrophic financial consequences to Glendale,” Zore wrote.
“What’s of interest here is that the judge goes against the national trend,” said Martin Steere, an attorney at Los Angeles law firm Manatt, Phelps & Phillips. Most state courts don’t want to get tangled up in ordering stores to stay open and ensuring they do so with adequate staff and stock, he said.
But Kite testified he was not asking the judge to run the stores. He said he had been in negotiations with Limited regarding nearly $800,000 in back rent. The mall wanted to keep the stores as tenants because of their national reputation and the kinds of shoppers they attract, he said.
Limited argued that the shops were “tenants at will,” because the mall had failed to meet the two-anchor provision in the lease. A 237,455-square-foot L.S. Ayres department store, part of an Indiana chain owned by May Department Stores Co., remained in operation. A Lazarus department store closed in July 1999, shortly after Kite Cos. bought Glendale for about $22 million and began a $23 million renovation.
But the leases, signed during the 1990s before Kite purchased the mall, describe department, variety or specialty stores of 40,000 square feet or larger as meeting anchor requirements. By February 2000 a 135,000-square-foot Lowe’s store opened in an outlot, and in May that year a 43,040-square-foot, 12-screen Kerasotes theater opened in the mall.
Limited claimed the closure of Lazarus should have triggered a lower rent as called for in the contract.
“For whatever reason, accounting didn’t do that, so for over a year we paid full minimum rent,” testified Gail Stearn, an attorney and vice president of real estate at Limited. Because of this alleged overpayment, Limited maintained that it didn’t owe anything and quit paying rent in March 2001, she said.
Glendale held that Limited was on a store-closing campaign as part of a strategic plan to build shareholder value, said Robert MacGill of Barnes & Thornburg, the Indianapolis law firm that represented the mall’s owners. Limited’s most recent annual report says it has closed about 1,500 underperforming stores and downsized 475 others.
The term “underperforming” is open to interpretation, but sales at the retailer’s Glendale stores have grown. Testimony showed that from 1999 to 2001, Limited’s sales rose from $400,000 to $700,000; Express and Bath & Body Works sales grew from $1.2 million to $1.4 million, while sales at Victoria’s Secret increased from $860,000 to $1 million.
Anthony Hebron, a Limited spokesman, said that though his company thinks it is within its rights “to pay reduced rent and to close,” the stores will continue to operate at the Indianapolis mall. The lease on Bath & Body Works and Express expires Nov. 30, while that for Victoria’s Secret runs out Aug. 1, 2003. Limited’s lease runs until June 30, 2008.
Legal observers say the verdict is unusual. In general, judges are loath to tell anyone that they cannot do something, said Rory O’Bryan, an adjunct professor at the Indiana University School of Law, Bloomington, and a real estate attorney at Harrison & Moberly in Indianapolis. “They are much more inclined to say you can do it, but you’ll have to pay,” he noted.
But it was difficult in this case to attach a dollar value to the closure of the stores.
Meanwhile, “the lease language certainly gave a leg up to the landlord,” he said. “Tenants may want to tighten their definition of an anchor, while a landlord may want a broader one.” Glendale Shopping Center, for instance, is host to the busiest branch of the Marion County Public Library. As more such nontraditional relationships develop in retailing, the numbers they bring may also come into play in leasing agreements, said O’Bryan.
As for Glendale, the last thing the mall wanted to do was sue a client, Kite said. “We hope they will decide to stay,” he said. “The Limited is a great retailer.”
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