Ruling on Teavana could force companies to rethink closures

The win by Simon Property Group could have a "chilling effect" on landlord-tenant negotiations.

A judge’s decision earlier this month forcing Starbucks to keep open 77 Teavana units could force restaurants and other retailers to rethink how they close locations and negotiate leases.

An Indiana judge agreed with mall owner Simon Property Group in its lawsuit over the closures, part of a plan Starbucks announced in July to close all 379 of its Teavana locations.

The judge in Marion County Superior Court in Indianapolis granted a temporary injunction keeping Starbucks from closing locations inside Simon-owned properties. The decision surprised many real estate experts who had rarely seen companies forced to keep open units they’d planned to shut down.

“It would have a chilling effect on lease terminations and closures,” said Stephen Cohen, an attorney out of Minneapolis who specializes in lease negotiations and closures.

The decision highlights a rarely enforced provision in many landlord-tenant agreements requiring retailers to keep locations operating for the duration of the lease. Such operating covenants can be difficult to enforce, Cohen said, because judges generally don’t want to police such actions, and most closures aren’t worth the landlord’s time to fight.

In addition, he said, most landlords don’t want retailers to keep struggling locations open because such locations can be poorly run and might do more harm than a closed location would.

“If you’re a mom and pop and you’re struggling and someone says you have to operate, how much effort are you going to put into it?” Cohen said. “It doesn’t mean you have to put the best staff in or have a fully stocked inventory. It doesn’t make for a good, attractive, profitable restaurant and you could end up pissing off their customers.”

In this case, however, the situation aligned for Simon to win an injunction, keeping the locations in those 77 shopping centers operational.

For one thing, this isn’t just one lease but 77, meaning Simon has a lot to lose from the closures. And Starbucks is a well-heeled company that wants to maintain a strong image for its Teavana brand—which the company plans to build inside its coffee shops. As such, the company is unlikely to do a poor job operating those locations, Cohen said.  

“They’re concerned about their own reputation,” he said. “They have their own goodwill they want to protect.”

The most likely result of this, Cohen said, is that the two sides negotiate some agreement keeping locations open until their leases run out—some expire next year—or until Simon can fill them again. He believes that Simon filed the lawsuit and won the injunction to negotiate a better deal out of Starbucks.

That’s a major victory for Simon, and comes amid a weak environment for many mall retailers that is seeing numerous, weaker malls struggle and in danger of closing. Dozens of retailers have filed for bankruptcy in the past two years, with many closing locations across the country.

“I think all of the malls are under tremendous pressure right now,” Cohen said.

If the decision does go to trial and operating provisions do become enforceable, many retailers and restaurants could be forced to change their practices. That’s a major issue, as weak traffic at many restaurant companies, along with high lease costs, put pressure on operators to consider shutting locations down.

“If this becomes precedent, you may have to think twice about closing,” Cohen said. “Now, are they going to take a 6,000-square-foot casual-dining chain on an out lot that closed and force it to reopen? No. But if you haven’t closed yet or have a simplified operation, and have a number of them, it may make people think twice about closing.”

More likely, he said, companies might rethink whether to enter into agreements that include an operating covenant. That could help them avoid such situations in the future.

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