On June 9, 2020, Simon Property Group (NYSE: SPG), the nation’s largest shopping mall operator, announced the termination of its $3.6 billion merger agreement with Taubman Centers (NYSE: TCO). The merger agreement was signed on February 9, 2020.

Besides being a harbinger of the upheaval in commercial real estate brought on by the COVID-19 pandemic -- particularly in the shopping center industry -- the decision by Simon sets up an interesting legal question.

Simon is asking a judge in state court in Michigan to declare that Taubman has experienced a “Material Adverse Effect” from the pandemic as defined by the merger agreement. Simon is arguing that Taubman’s high end enclosed shopping centers have been more acutely damaged by the COVID-19 pandemic that other subsets of the retail industry. Simon also argues that Taubman’s failure to quickly curtail expenses as a result of the pandemic breached covenants in the merger agreement entitling Simon to terminate the agreement.

On May 21, F.L. suggested to analysts Shrey Verma and Matt Tracy of Reorg that if Simon were to invoke the Material Adverse Effect provision of the merger agreement it would need to argue that the high end enclosed malls that Taubman owns and operates have been more devasted by the global pandemic than other retail categories. “Simon would argue that you can do a comparative analysis [to prove its point]- maybe with community or grocery anchored centers . . . ” Gorman said. In fact mall rent collections for April and May have been reported to be less than 30% while other subcategories of retail are averaging closer to 60%.

The Reorg analysts continued: “David Simon’s comments regarding how the market should view a company such as Simon as not just a “mall company” but a “retail real estate company” foreshadowed a legal strategy revolving around a comparison between Taubman and a broader set of REITs. Such a comparison may aid Simon and its legal team in proving to the court that Taubman has suffered “disproportionately” compared with “other participants in the industries in which” Simon operates.”