Bal Harbour Shops may soon have one less name on its roster of tenants. The owner of the foliage-and-fountain fused luxury shopping center in Miami – which is home to the likes of Chanel, Balenciaga, Bottega Veneta, Brunello Cucinelli, and Gucci, among others – wants to give Saks Fifth Avenue the boot after the upscale department store chain allegedly stopped paying rent for its 143,142 square foot space in March. In a newly-filed lawsuit, Bal Harbour Shops LLC is asking a Florida court for an eviction judgment against Saks and damages of more than $1.9 million.
According to the complaint that it filed with the Circuit Court for the Eleventh Judicial Circuit on August 17 (as first reported by Bloomberg), Bal Harbour Shops asserts that despite entering into a since-modified lease agreement back in June 1974 for space in the Miami mall, Saks has not paid rent since March 16, 2020. “Pursuant to the lease,” Bal Harbour Shops states that Saks “is not obligated to pay any ‘minimum rent,’” per se, but is “obligated to pay ‘percentage rent’ in amounts determined by [its] ‘net sales’ from the Saks premises,” as well as “certain ‘pass-through’ expenses relating to common area expenses, real estate taxes, and marketing fraud charges.”
153-year old Saks breached the parties’ longstanding lease, Bal Harbour Shops argues, “when it failed to ‘timely pay’ the rent due under the lease since March 16, 2020.”
Saks’ sweeping Bal Harbour store, which is currently open for business, “has generated ‘net sales’ … at all times during which [it] has refused to pay rent under the lease,” according to Bal Harbour. In fact, the mall owner alleges that “even during the period when the Saks store was ‘closed’” as a result of a COVID-specific mandate in Florida, Saks still “generated ‘net sales’” from its store, but nonetheless, failed to meet the payment terms of the lease.
After failing to respond to or “timely comply” with a July 8 letter from Bal Harbour Shops, which called on it to pay the rent in full or give up possession of the store, Bal Harbour claims that on August 4, Saks served it with a letter, in which it advised the mall owner that “due to the COVID-19 pandemic, and despite [its’ operation and uninterrupted net sales from the Saks premises throughout the COVID-19 pandemic, [its] ‘ability to earn profits has been seriously undermined,’ [and] is not obligated to pay rent under the lease until ‘all government restrictions cease’ and ‘business returns to pre-COVID-19 levels.’”
Bal Harbour pushes back against Saks’ claims in its complaint, asserting that Saks’ “reported sales in June of 2020 actually exceeded [its] reported sales in June of 2019, [and] yet, Saks continues to refuse to pay the rent due. “ As of July 8, Saks owed Bal Harbour more than $1.9 million under the lease, the company claims, an amount that continues to accrue.
With the foregoing in mind, Bal Harbour has asked the court to issue a judgment against Saks for eviction. It is also seeking damages in connection with Saks’ failure to pay the $1.9 million in rent, plus “reasonable attorneys’ fees and costs,” and still yet, Bal Harbour wants to claw back any of the $18.5 million allowance that it advanced to Saks as part of a renovation of its space that has not already been used for such renovations.
COVID-era Retail Relationships
The lawsuit comes as a growing number of retail landlords and brands across the globe are facing off after COVID-19 has wreaked havoc on many already-strained relationships. “Though the coronavirus crisis has brought things to a boil, tensions between shopping center tenants and landlords have simmered for decades,” according to retail history expert and Macquarie University lecturer Matthew Bailey.
He says that no shortage of “landlords have some of the most convenient and attractive locations for stores, they have control over entire retail environments, and in many cases, even collect the sales data of their tenants, [and] their bargaining position in leasing negotiations is invariably very strong.” Yet, the waters have been muddied significantly by the global health pandemic, which, has not only required stores to close down for weeks, and at least initially, prompted consumers to stop their usual shopping, it “has accelerated pre-existing trends in retail, such as consumers’ migration to e-commerce,” per Bloomberg.
The result has been a clash over “the underlying power dynamics between tenants and landlords,” which is playing out, in part, in the form of legal squabbles over rent. Looking beyond, Saks and Bal Harbour, Gap, for example, warned in an April 2020 Securities and Exchange Commission filing that it “may not have enough cash flow to sufficiently fund its operations and said that it is looking to renegotiate or defer the terms of its leases,” CNBC reported at the time; since June, the retailer has been ensnared in a legal battle with mall giant Simon Property Group, which sued Gap for allegedly failing to pay more than $65.9 million in rent.
Around the same time, Valentino filed suit against Savitt Partners LLC, the landlord for its four-story Fifth Avenue New York Boutique in midtown Manhattan, arguing that COVID-19 has made retail “untenable,” and pointing to a provision in the parties’ lease that mandates that it use the retail space in a manner that is “consistent with the luxury, prestigious, high-quality reputation of the immediate Fifth Avenue neighborhood.” Still yet, Victoria’s Secret and its parent company L Brands Inc. similarly sued the owner of the lingerie company’s Herald Square, New York flagship on the basis that is “impossible” to pay the nearly $1 million per month rent.
All the while, lease-specific concerns have been cited in many of the big-name bankruptcies that have been filed amid COVID.
The retail landlord, tenant relationship “has often been a mutually advantageous relationship,” Bailey says. Although, he notes that “there has always been a contest between [the parties] over how they share both benefits and costs.” This aspect is coming under the microscope in light of the global pandemic, as at least some retailers argue that “rent should be based on the value of the customer traffic the shopping center delivers to their stores” and even if stores have reopened, “those customers have evaporated with COVID-19.”
For retail landlords, Bailey states there are longer-term questions that will need to be answered: “Will the current standoff push retailers towards a permanently smaller physical footprint and greater investment in online shopfronts? Has it created even more uncertainty about retail’s future? And … How deeply has trust been eroded between retail landlords and tenants?”
A representative for Saks’ parent company Hudson’s Bay Company was not immediately available for comment.
UPDATED (September 3, 2020): On the heels of Bal Harbour Shops’ lawsuit being removed to federal court, Saks has responded with a suit of its own. In a complaint filed in September 3, Saks accuses Bal Harbour Shops and Whitman Family Development’s CEO Matthew Whitman Lazenby of defamation, breach of contract and breach of fiduciary duty. The retail chain argues that the defendants “initiated a malicious public smear campaign designed for no purpose other than to exact revenge on a tenant who justifiably stood up to the unjustified demands of an unreasonable landlord.”
UPDATED (December 30, 2020): The case has been stayed pending an appeal to the Eleventh Circuit on the heels of the court granting Saks’s Motion to Deposit Funds.
*The case is Bal Harbour Shops LLC v. Saks Fifth Avenue LLC, 1:20-cv-23504 (S.D. Fla.).