Brands and Landlords Are Suing Each Other — and There Is No Right Answer To Who Is Right
Here in Paris, commerce is once again open. Stores reopened and people returned to the streets. However, in Paris, retailers depend a lot on tourists, so stores are not yet even close to being as crowded as they use to be before the pandemic. Therefore, stores are not making the sales they use to, but the rent price of their space, be that near Opera Garnier or at Champs-Élysées, remains the same. The math does not close there. But in Paris, stores are at least open and France will be open for tourism from some countries very soon. The same cannot be said about many regions in the United States, Brazil, India, and many other countries.
This scenario is creating a very complicated situation between brands and landlords, in which it is very hard to point who is right and who is wrong. On one side, landlords are filling lawsuits brands that are not paying their rents for the last months, since the pandemic impacted them. On the other side, brands are suing landlords because their rent is not supposedly worth the same as before the pandemic. Confusing right? Let’s try to understand what is happening, some of the solutions found around the world, and how this can define the survival of some companies — from both sides.
They Are All Suing Each Other
Last week, Valentino filed a lawsuit against Savitt Partners, the landlord of its Fifth Avenue store, in order to leave the lease with them that runs until 2029. In the lawsuit, the luxury company stated: “Even in a post-pandemic New York City (should such a day arrive), the social and economic landscapes have been radically altered”. They also said that their ability to drive sales at this store has been “drastically, if not irreparably, hindered”. Not very far from the Valentino store, another brand is currently suing its landlord — Victoria’s Secret. The lingerie brand is currently paying almost 1 million per month in rent to keep its flagship store in Herald Square, New York. Victoria’s Secret, under its parent company L Brands, filed a lawsuit against its landlord SL Green Realty with a similar speech to Valentino: the retail landscape is forever “forever shattered.”
But landlords are also not happy with the situation and they also have their bills to pay. The Simon Property Group, for example, recently sued Gap Inc. for owning them US$66 million in rent and other charges. Gap was also sued by two other landlords.
In the UK, lawsuits have not surged yet because the government banned commercial landlords from taking any legal action against tenants not paying rent until the end of September. But it does not mean the situation is not complicated too. In the UK, commercial rent collection happens four times a year. At the first one, which was in March, just after the lockdown was imposed, landlords across the UK managed to collect only half of what they suppose to receive. Brands such as Primark and JD Sports stopped paying rent since the pandemic imposed lockdown measures. The next rent collection day is close and property analysts are predicting landlords will collect even less than in March, with some of them receiving less than 20% of what they are owed.
In Brazil, the situation is more similar to the one in the United States, especially because commerce is still either closed or open for a shorter time. The largest retailers, such as C&A, Lojas Renner, and Marisa communicated some of their landlords in March that they would not be paying full rent. In São Paulo and Rio de Janeiro, some malls, which are extremely popular in the country, offered a 50% discount on rent for the time stores will be closed, while others are not charging at all for the days when retailers won’t be open. Other malls are holding a different negotiation with each tenant. The difficult situation is already resulting in some legal action from companies and landlords.
In India, the situation is also getting to the level of legal action. The majority of mall owners are not open for negotiations and retailers are getting worried about how they will meet rent payments. Even with commerce recently reopening in the country, footfall is way lower than normal, making tenants preoccupied with the near-term sales and the conditions of rent that are in place right now.
The problem in all these scenarios is that both parts hold some truth to their statement. Indeed, for retailers, paying full rent when no revenue is being generated does not make sense. However, for landlords, just not receiving rent because of a lockdown out of their control can ruin some real state companies, especially the small businesses. In the end, landlords either compromise to discounts, because a little payment is better than no payment at all, or take legal action. Landlords often like to point out that retailers should have prepared for a moment like this. But shouldn’t both parts share this responsibility? Some solutions are being considered and even applied by some players in an attempt to ease the tension between landlords and retailers.
How to Solve this Issue?
Neiman and Marcus, Hudson Yards and many mall tenants use a revenue-sharing model of rent, in which the payment is related to the revenues made by the store, instead of a fixed monthly lease. This model makes the impact of lockdown measures the responsibility and problem of both parties. In the future, the model also makes successful sales months a celebration for both.
Another approach, which is way more radical than the previous one, consists of landlords buying struggling tenants’ stakes to keep their business running. Brookfield Properties, for example, announced in May a US$5 billion fund to buy partial ownership of weak retailers. The group already used this approach to buy Forever 21 out of bankruptcy with its rival Simon Property Group. The two are considering doing the same to help J.C. Penney, a retailer that recently announced bankruptcy and that is an important tenant for both real state companies. Deborah Weinswig, founder and chief executive of Coresight Research, strongly believes in this approach from real state investment funds, as she stated:
“If more of these REITs (real estate investment trust) could say, ‘Hey, if you’re a retailer doing under $100 million in sales, we’ll give you free space, a payment platform and help you with e-commerce’ in exchange for some equity, it could really change the landscape of retail, big and small.”
But Is This Really a Covid-19 Problem?
The thing is, even before the pandemic, brick-and-mortar was not performing well in some countries such as the United States. There were too many stores even before and the system was already collapsing. The lockdown just accelerated the process, and this is a landlord and tenant problem.
If the online shopping habits developed by consumers during lockdown become the norm, the retail situation will never return to “normal”. Brands such as Nike and Zara are already planning store closures and job cuts to focus on e-commerce. Of course, stores won’t disappear as a whole, as the majority of consumers still prefer to buy brick-and-mortar, but every research points that they may decrease in number — and landlords should be prepared for that.
I personally love going to stores, way more than shopping online. However, I indeed don’t think we really need four Zaras or three Diors all 10 minutes walk from each other (yep, that’s the case in Paris). Landlords and tenants have a long-term problem to solve, a way more threatening problem than the temporary lockdown.
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