A New York state court ruled against Valentino last month in its quest to escape from the lease for its sweeping store on Fifth Avenue in New York, arguing that COVID-19 has made retail untenable, thereby, excusing its performance in connection with the pricey lease agreement. On the heels of Valentino filing suit against its landlord 693 Fifth Owner LLC in June on that basis that its business in the four-story midtown Manhattan boutique “has been substantially hindered and rendered impractical, unfeasible and no longer workable,” a New York Supreme Court dismissed the complaint, prompting the fashion brand to appeal.
Because the parties had “expressly allocated the risk that Valentino would not be able to operate its business” in their May 2013 lease agreement, making it so that Valentino is “not forgiven from its performance, including its obligation to pay rent by virtue of a state law,” Justice Andrew Borrok granted 693 Fifth Owner LLC’s motion to dismiss Valentino’s case, including its impossibility of performance, rescission based on failure of consideration, and constrictive eviction claims, as well as the fashion house’s declaratory judgment claims for frustration of purpose.
“The fact that the COVID-19 pandemic was not specifically enumerated by the parties [in the lease agreement] does not change the result,” Justice Borrok wrote in his decision, “because the lease is drafted broadly and encompasses the present situation by providing that nothing contained in […] the lease, including ‘restrictive governmental laws or regulations,’ certain cataclysmic events, ‘or other reason of a similar or dissimilar nature beyond the reasonable control of the party delayed in performing work or doing acts required’ shall excuse the payment of rent.”
Speaking to Valentino’s individual claims, the judge held that the Valentino Garavani-founded brand’s “failure to plead that it moved out of the subject premises or that the landlord substantially interfered with its use and possession dooms its claim for constructive eviction.” He stated that “the Valentino store continued to operate as of July 22, 2020,” and in fact, amid the pandemic, “A sign was placed on the store indicating that it was open for curbside retail and by appointment.”
“Valentino’s conclusory and general allegation that the landlord failed to maintain the premises, even taken as true as the court must at this stage of the proceeding, lacks causation,” the decision states. “Finally, to the extent that Valentino indicated that after filing this action, it subsequently made the decision to move out and vacate the premises also does not change the result,” Borrok stated, ultimately determining that “no wrongful act of the landlord is alleged to have caused the necessity of this decision.”
In filing suit against 693 Fifth Owner LLC in June, Valentino argued that “the current social and economic climate, filled with COVID-19-related restrictions, social distancing measures, a lack of consumer confidence and a prevailing fear of patronizing, in-person, ‘non-essential’ luxury retail boutiques,” prevented it from operating its store as usual, something that it said that it did not see changing in the near future. As such, the Mayhoola for Investments-owned brand pointed to a provision in its lease – which was slated to run from August 2013 until July 2029 – 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.”
On the heels of the court’s dismissal, Valentino filed a notice of appeal on February 17, asserting that the court misapplied the legal standard for a motion to dismiss. Specifically, Valentino claims that it “adequately pled each of its causes of action for (i) frustration of purpose, (ii) impossibility of performance, (iii) rescission based upon failure of consideration, (iv) constructive eviction and (v) other declaratory and/or injunctive relief that should not have been dismissed at that juncture.” Yet, it argues that “the court mistakenly held that these claims were vitiated by the subject lease, but (a) the risks of the COVID-19 pandemic were not allocated to [Valentino] in any provision of the subject lease, and (b) the lease does not waive or bar any of [its] equitable and/or quasi-contractual causes of action.”
Fast forward two days, and 693 Fifth Owner initiated a separate but related action of its own, accusing Valentino of breaching the terms of the lease by abandoning the space in December and failing to pay rent even before that (beginning in September 2020), while also allegedly failing to repair damage to the property.
Despite Valentino’s claims that it was damaged significantly as a result of the pandemic and resulting lockdowns and marked drops in luxury goods sales, 693 Fifth Owner argues that the brand is blaming the pandemic in order to get out of the lease, when in reality, the brand “had been suffering since well before the COVID-19 pandemic,” and has opted for a smaller – and less expensive – lease at 135 Spring Street.
With the foregoing in mind and given the property damage that was allegedly caused by the brand, including “sizable holes” in and paint on the Venetian Terrazzo marble panels within the store space, 693 Fifth Owner is seeking more than $200 million in damages – $15.3 million for the damages and rent lost during the time that repairs were being made, $6.6 million for unpaid rent between September 2020 to February 2021, and $184 million in rent for the rest of the 16-year lease’s duration.
Real Estate Lawsuits Abound
The rival lawsuits come as a growing number of brands and retailers have clashed with their landlords in light of COVID-centric lockdowns. Holland & Knight LLP lawyers Janis Boyarsky Schiff, Elena Otero, Meg Raker, and Danielle Moore stated that as of this spring, landlords had been “inundated with requests from tenants regarding their financial obligations under their leases,” with at least some of those requests resulting in litigation.
For example, as recently as late 2020, Stella McCartney was embroiled in a $9 million legal battle 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 “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 until it allegedly stopped paying in April.
According to McCartney’s declaratory judgment suit, “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,” and thereby, frustrating the “purpose in paying a premium rent for the premises in order to obtain the benefits of foot traffic in a luxury shopping district.”
McCartney’s suit follows from similar actions involving Saks Fifth Avenue (which is battling with the owner of Miami’s luxury Bal Habour shops after allegedly failing to pay nearly $2 million in rent), Victoria’s Secret, the Gap and Old Navy, Club Monaco, and Hugo Boss, among others, many of which have seen “commercial tenants mount attempts to obtain judicial relief from their lease obligations on the grounds that COVID-19 has rendered performance of the lease impossible and impracticable, or has substantially frustrated the purpose of the lease,” per Moritt Hock & Hamroff LLP’s Marc Hamroff and Danielle Marlow. They note that “these claims have had varying degrees of success, depending in large measure on the particular judge assigned to each case.”
In accordance with most retail leases, with many expensive outposts on some of the most famous shopping streets and establishments in the U.S. coming under the microscope as result of COVID, “the tenant takes on most of the risk for the landlord as owner,” according to Boyarsky Schiff, Otero, Raker, and Moore, who state that while such leases have force majeure or excusable delay clauses that carve out the payment obligations of the tenant and that “toll certain performance obligations affected by the pandemic, such provisions are generally not broad enough to run to the financial obligations by a tenant contained in a lease.” In fact, they note that “most leases expressly state that events of force majeure do not curtail the tenant’s obligation to pay rent,” which is “in line with the long-standing precedent in most jurisdictions, and in most lease documents, that financial inability/hardship is not a force majeure event.”
As such, “In most instances, tenants will remain legally obligated to pay rent.” However, Boyarsky Schiff, Otero, Raker, and Moore encourage landlords to “take a number of business considerations into account prior to responding to tenant requests” in light of the broad impact of COVID-19, which has presented landlords and retail tenants with unprecedented challenges and opportunities.” The ramifications of COVID, they say, makes it “critical that the landlord-tenant relationship remain positive and strong in order for both parties to weather this pandemic and succeed in the future.”
*The case is Valentino USA, Inc. v. 693 Fifth Owner LLC, 652605/2020 (N.Y. Sup).