Teavana and Whole Foods: Is the Pendulum Swinging in Favor of Protecting Mall Landlords Against Strategic Tenant Closures?

by Goulston & Storrs PC
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As mall landlords continue to see substantial tenant vacancies, some landlords have begun to challenge solvent tenants who decide to go dark before the end of their lease. In two important recent cases — Simon Property Group, L.P. v. Starbucks Corporation, Case No. 49D01-1708-PL-032170 (Indiana Superior Court) and Bellevue Square, LLC v. Whole Foods Market Pacific Northwest, Inc., Case No. 17-2-27617-1 SEA (Washington Superior Court) — state courts have enforced continuous operations clauses against a group of Teavana stores and a single Whole Foods, requiring those stores to continue operating in retail malls even though, according to the tenants, the stores were not profitable. The cases are significant because they appear to signal a new willingness on the part of some courts to enforce covenants to keep open against non-anchor tenants. In the past, courts have enforced keep open clauses primarily, if not exclusively, in situations involving anchor tenants. In these new cases, courts are stopping non-anchor tenants from committing so-called “efficient breaches” of their leases, requiring them to keep operating even where particular stores allegedly were underperforming financially.

Simon v. Starbucks: On July 27, 2017, Starbucks announced its plan to close all of its 379 Teavana stores. Simon promptly brought suit to force Starbucks to keep operating 77 of those stores located in malls owned and operated by Simon throughout the country. Teavana stores have fairly small footprints, anywhere from a few hundred feet to approximately 2,000 square feet, and would not by any definition be considered anchor tenants. The Court acknowledged it was unaware of a previous instance in which a non-anchor tenant had been subject to an injunction requiring it to continue to operate. Nonetheless, the Court ordered Starbucks to keep operating the Teavana stores located in Simon malls because the overall balance of harms weighed in favor of Simon. In particular, the Court noted the otherwise strong financial position of Starbucks – of which Teavana was only a part – and held that Simon would suffer irreparable harm from the mass closures of Teavana stores. The Court focused especially on the domino effect the closures could have on Simon’s other tenants and the effects on consumers, harms that could not be easily quantified or compensated by money damages.

Bellevue Square, LLC v. Whole Foods Market Pacific Northwest, Inc.: On October 14, 2017, approximately one year into its 20-year lease in the Bellevue Square Mall, Whole Foods suddenly ceased operations, claiming the store was underperforming. Bellevue Square filed suit, seeking to force Whole Foods to reopen the store. On December 7, the Court ordered Whole Foods to reopen the closed store within 14 days. Similar to the Teavana case, the Court found that Bellevue Square would suffer irreparable harm as a result of Whole Foods vacating the leased premises after only one year of operations – including impacts on lease negotiations with other tenants, its relationship with lenders, and the reputation of Bellevue Square. The Court also found that such harms would be difficult to reduce to monetary damages individually and impossible to quantify collectively, and that Whole Foods is a highly profitable company. The Court did not decide whether Whole Foods was an anchor tenant, but stated that even “a smaller tenant can clearly have a broad impact” that would justify an order forcing it to stay open.

Although these cases gave big (albeit preliminary) wins to two mall landlords, their holdings should be treated cautiously by landlords hoping to force a typical tenant from going dark. Of particular importance is that both of the tenants in the cases are enormous, highly profitable corporations that made strategic business decisions to close certain stores. A truly struggling tenant will likely not be considered in the same light as Starbucks and Whole Foods. Where an independent tenant or struggling chain is going dark, a landlord will have a much harder time showing the balance of equities weighs in favor of forcing that struggling tenant to stay open. Additionally, even in these cases, where the balance of equities favors the landlords, Simon and Bellevue Square were both required to post substantial bonds –$15 million and $2 million respectively. Simon and Bellevue Square could ultimately forfeit those bond amounts if they do not prevail at trial.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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