Stella McCartney has been embroiled in a legal battle since late last year over the brand’s Madison Avenue store in Manhattan. In the complaint that it filed in a New York state court in November, Mallett, Inc. claims that it entered into a 10-year-long sublease agreement with Stella McCartney’s American arm in 2016 (and a modified agreement in 2019) “covering the basement, ground floor, parlor floor and third floor in the building located at 929 Madison Avenue” in furtherance of which the London-based fashion brand was paying upwards of $1.5 million per year in rent.
The parties’ arrangement appeared to be working out well until COVID-19 hit, and beginning in April, Mallett claims that Stella McCartney failed to pay its monthly rent and to replenish the security deposit and “cure its default,” prompting Mallett to file suit in November. Setting out a number of contract claims, Mallet asserted that Stella McCartney “wrongfully remains in possession of the subleased premises,” and is “indebted to [Mallett] in the sum of $9,120,420.32,” which is the “aggregate present value of fixed rent and additional rent and all other charges … that would have accrued for the remaining term of the sublease through and including the expiration date” in February 2027.
On January 8, McCartney responded to Mallett’s complaint, denying the majority of the company’s claims, asserting a number of affirmative defenses (frustration of purpose, failure of consideration, impossibility, commercial impracticability, etc.), and lodging a complaint of its own, as first reported by WWD. At the center of McCartney’s defenses and its countersuit is, of course, the impact of that COVID-19 pandemic has had on its operations of this specific outpost and its business more generally.
In its declaratory judgment countersuit, McCartney asserts that “the COVID-19 pandemic has presented unique and unprecedented circumstances that were unforeseeable – indeed, unimaginable – at the time the sublease was executed,” with the March 2020 shutdowns bringing New York City to “a complete halt and all business and commercial activity to a standstill.”
“To protect the health and safety of its employees, customers, and the surrounding community, and comply with applicable law,” McCartney says that it “was required to close this store and keep it closed for an extended period of time,” and even in late June when “restrictions were relaxed and non-essential retail businesses were able to reopen,” that reopening was “in a manner drastically different from what was contemplated when the sublease was negotiated.”
Specifically, McCartney argues that “even though some retail in the Madison Avenue area has reopened, it looks nothing like it did pre-March 2020,” which is significant because its decision to sign the lease for the store and “pay such enormous sums [of rent since 2016] was based on the store’s high-profile location,” and the many “world-renowned flagships and independent boutiques [that] surround the premises” that serve to “make this area of Manhattan one of the world’s most popular luxury shopping destinations,” per McCartney.
However, while that may have been the reality when it signed the lease, McCartney argues that it can no longer “operate a luxury retail store as originally envisioned given the current environment.” More particularly, the 21-year old fashion company argues that the “purpose in paying a premium rent for the premises in order to obtain the benefits of foot traffic in a luxury shopping district has been completely frustrated by (i) the drastic reduction in foot traffic caused by COVID-19 restrictions, business closures, travel bans, and work-from-home policies; and (ii) the social distancing requirements, which prevent [it] from having more than a fraction of its intended capacity of customers in its store at any given time, and actually discourage potential customers from visiting the retail store.”
But for the expectation of a thriving retail environment – including a “high-profile location on Madison Avenue and throngs of luxury shoppers” – McCartney asserts that it “would never have agreed to pay over $1.5 million a year in rent for the premises.”
As such, the pandemic – and corresponding “the COVID-19 executive orders of the Governor of the State of New York, and/or other governmental restrictions” – have prevented McCartney from “occupying the premises and operating its business as contemplated,” and “completely frustrated” the purpose of the sublease, thereby, rendering “the object and purpose of the sublease impossible, illegal, and impracticable.” The result, the LVMH-affiliated brand claims, “is inequitable,” in part because “the parties’ mutual purpose for entering into the sublease has been frustrated, and the consideration [that McCartney] was to receive under the sublease.” Thus, the contract, itself – “has failed,” ultimately, excusing McCartney of its “obligation to perform any of its alleged obligations under the sublease.”
With the foregoing in mind, McCartney has asked the court, among other things, to declare that as a result of the effects of the pandemic, none of which were caused by the brand, the purpose of the sublease has been frustrated rendering it “void, voidable, or otherwise legally unenforceable,” and that McCartney’s inability to “fully use or occupy or conduct its business from the premises, as originally contemplated under the sublease” translates to a permanent abatement or excusal of its obligations under the contract, which “must be cancelled.”
Beyond that, McCartney also wants the court to order that Mallett return its “full security deposit as a result of the termination of the sublease,” and pay any relevant interest and attorneys fees.
The rival lawsuits follow from a number of COVID-centric real estate squabbles, including cases involving Valentino and its Madison Avenue lease, as well as Saks Fifth Avenue and its 143,142 square foot space in Miami’s Bal Harbour Shops, all of which fall neatly in line with what Loeb & Loeb LLP partner and chair of the firm’s Real Estate Litigation practice Gil Feder says is the “biggest trend in real estate litigation right now,” namely, COVID-19 disputes that “arise when a tenant seeks a rent abatement or deferral, relying on COVID-19 as a reason for not being able to pay rent.”
“COVID-19 has added a whole level of uncertainty to what were otherwise enforceable lease clauses,” per Feder, who notes that “now it is uncertain as to what will be enforceable, making it harder for both landlords and tenants to protect themselves” going forward, and to navigate existing contracts.
Tenants that have been “able to successfully reopen are more likely to want to stay at their premises, and therefore, are usually seeking short-term help.” However, other tenants, such as those “with a more uncertain economic future, are obviously looking for greater concessions from their landlords,” Feder says. “Indeed, certain negotiations taking place right now involve landlords agreeing to base some of the rent payments on the tenant’s future profitability.”
While vaccines are being rolled out, giving rise to renewed hope for retail, it has, nonetheless, become clear that “the pandemic is likely to be a longer-term phenomenon,” and as a result, “tenants have increasingly started to call for more fundamental changes to the way retail leases work.” DLA Piper’s Graham Quinn and Micheál Mulvey echo Feder’s sentiment, asserting that “many retailers are calling for a shift from open-market-based to turnover-based rents, with such arrangements – which are usually structured as a combination of a fixed base rent – topped up by a percentage of the turnover generated by the retailer at or in connection with the store.”
Quinn and Mulvey say that it is “still too early to say how the effects of the COVID-19 pandemic will play out.” However, what does seem certain is that “the rigid traditional leasing model is going to need to evolve in a way that demands more flexibility, pragmatism and long-term thinking from landlords,” and ultimately, this means that landlords and tenants “need to start thinking more in terms of their shared interests and work together to develop a mutually beneficial relationship.”
*The case is Mallett, Inc. v. Stella McCartney America, Inc. 656287/2020 (NY Sup.).
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