Simon Stops Starbucks with Injunction Keeping 77 Teavana Stores Open Nationwide Simon Stops Starbucks with Injunction Keeping 77 Teavana Stores Open Nationwide

Simon Stops Starbucks with Injunction Keeping 77 Teavana Stores Open Nationwide

In a recent order in Indiana, the Marion County Commercial Court granted Simon Property Group’s (“Simon”) motion for a preliminary injunction to stop Starbucks Corporation (“Starbucks”) from ceasing to operate 77 Teavana stores in Simon malls across the country.   
 
This case is significant in concluding that the harm a retail landlord suffers from non-enforcement of a continuous operations provision extends beyond loss of rents and may be irreparable in certain situations. Retailers should consider the following three things to protect themselves from being in similar situations:
 
  1. Retail landlords should couple continuous operations covenants with express rights to specific performance as a remedy in their leases. Indiana law in particular strongly favors upholding the terms bargained by sophisticated parties such as Starbucks and Simon.
  2.  Retail tenants should be careful in negotiating the assumption of leases, especially when provisions like the continuous operations covenants or rights to specific performance could limit future flexibility. The court held Starbucks to the bargain struck between Simon and Teavana, calling such assumption of “financial and business risks inherent in assuming the obligations” relating to the continuous operations covenants and specific performance remedies a “business decision.” The court then weighed the “straight-forward and pecuniary” harm to Starbucks as less than the “difficult to quantify” harm to Simon.
  3. Retail tenants should also consider their position in a mix of tenants. The court fully recognized the importance of tenant mix in a mall and favorably cited Simon’s description of “curating” this mix and creating “a co-dependent ecosystem that derives its success from the curation of a particular tenant mix, commonalities, externalities and cross-promotion.” The court seemed to take such “synergy” into great consideration when evaluating the harm to Simon were Starbucks to close its Teavana stores, and retail tenants should do the same. The court also factored in the closings by financially distressed tenants and compared this to the comparatively healthy status of Starbucks. Though Starbucks argued other tenants set a precedent of closing stores, Starbucks was held to a different standard and will bear the cost if the court eventually rules in Simon’s favor on the merits.
In this case, the court referred frequently to Starbucks’ own witnesses regarding the importance of continuous operation covenants and relationships between tenants at a mall. Because Starbucks so clearly validated the concerns Simon raised with respect to a ripple effect if a tenant such as Teavana were to leave, the court could easily find there were incalculable and irreparable harms to Simon justifying a preliminary injunction.
 
To obtain a preliminary injunction, a movant must show four elements: a reasonable likelihood of success on the merits; the remedies at law are inadequate and there will be irreparable harm during the pendency of the action; the threatened injury to the movant from denying the motion outweighs the potential harm to the nonmovant from granting the motion; the public interest would not be disserved by granting the injunction. In particular, the court concluded Simon would suffer irreparable harm from an inability to enforce Continuous operations covenants in the leases, among other things.
 
On the first prong, the court found “Simon [was] likely to succeed on the merits of its claim for anticipatory breach of contract and for specific performance of the continuous operations covenant based on the better than negligible chance of showing Starbucks breached its leases and Indiana case law supporting a litigant’s right to the remedy [of] specific performance.”
 
On the finding of irreparable harm, the court stated “irreparable in the proper sense is harm which the court could not later redress.” The court cited case law focusing on the difficulty of quantifying damages as significant in determining whether those damages were an adequate remedy. Though there is a pattern of case law where courts do not find irreparable harm based on the closure of a single store, the court here reasoned there was a broader context in which to examine harm because of the specially curated mix of stores in the mall and the number of leases at issue.
 
With respect to the enforcement of the continuous operation covenants, the court further reasoned that not granting the injunction, and therefore, not enforcing these provisions would have a ripple effect as to Simon’s other tenants across all of its malls. “A ruling that affects Simon’s ability to enforce the continuous operation covenants across all of its malls would necessarily harm Simon’s long-term reliance on tenants remaining for the terms of their leases and, by extension, their ability to maintain the mix of tenants among its malls.” In sum, the court found the following threatened injuries to Simon: the harms resulting from vacancies including the difficulty of filling the vacancies with desirable tenants, diminished image of Simon’s malls, and harm to Simon’s reputation with other tenants and consumers; harm to Simon’s long-term ability to effectively plan and operate if tenants could close their stores at will; harm to Simon’s short-term ability to operate based on the likelihood that other tenants will follow Starbucks’ example and leave; Simon’s ability to enforce the specific performance remedy once the Teavana stores have closed.
 
On the prong regarding the balance of harms, the court compared the above harms to Simon against the harms to Starbucks, which were the following: no more than $15 million in operating costs to stay open from January 2018 to October 2018 and operational challenges such as re-establishing relationships with vendors and costs and difficulty of ensuring the stores are adequately supplied and staffed. The court contrasted the estimated $15 million in operating costs with Starbucks total revenue of $5.44 billion in 2016. The court also noted the operational challenges were self-imposed and therefore given less weight in the balancing. The $15 million in operating costs formed the basis of Simon’s security bond for the injunction.
 
On the final prong regarding the public interest, the court dismissed Starbucks’ argument that the public would suffer from the court having to allocate resources to monitor Starbucks’ compliance with the order and instead concluded any costs of monitoring would be borne by the parties. The court also noted Indiana has a strong public policy of enforcing parties’ contracts, which would be served by the order of this preliminary injunction.
 
Retail landlords and retail tenants alike should communicate regarding any proposal to close a location before the lease has expired. This order for a preliminary injunction preserves the status quo and also gives Simon and Starbucks time to negotiate a resolution, which may include early closures. Increased communication about specific pressures and concerns could help other parties negotiate terms and avoid a court battle.

For more informaton, contact Matt DeLaruelleJoanne GoldhandAnnie Xie or a member of our Real Estate Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
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