Teavana lawsuit ruling is not a fix for all centers

David P. Vallas
Vice chair, commercial litigation, and co-chair, real estate litigation, Polsinelli

A recent decision in the Simon Property Group L.P. v. Starbucks Corporation case prevented Starbucks from shuttering 77 of its Teavana stores in Simon-owned or -managed properties. While this decision has made headlines as a tremendous victory for Simon, it is not a guarantee that other shopping center owners can prevent retailers from closing stores prematurely. The Simon decision turned heavily on four facts specific to that dispute, which are not often present in other retail closings.

Kelly D. Stohs
Business litigator, and co-chair, real estate litigation, Polsinelli

First, like most shopping center leases, each of the Teavana leases contained a continuous operation provision requiring Starbucks to operate its Teavana stores throughout the term of these lease. Such provisions are common and vital to protect the co-tenancy that creates a vibrant, successful shopping center. Typically, when a retail tenant closes in breach of a continuous operations provision, the general remedies provision of the lease guides the landlord. Most of the Teavana leases contained additional language in Simon’s favor, however. Seventy-five of the 77 continuous-operations provisions expressly dictated that Simon “shall have the right to specific performance by [Starbucks] upon [Starbucks’s] failure to comply with the provisions of this Section …” Moreover, the general remedies provision in each of the Teavana leases, including the five that did not identify specific performance as a remedy for breach of the continuous operations provision, empowered Simon to obtain injunctive relief for any breach “or threatened breach by Tenant of the terms and provisions of this Lease …” Starbucks could not and did not deny the existence of these clearly defined remedies or that closures would violate them.

The Simon court explained that courts typically enforce parties’ negotiated remedies and found it significant that 72 of the Teavana leases expressly gave Simon the right to specific performance as a remedy. The parties clearly intended that Simon could compel Starbucks to keep its Teavana stores operating. Shopping center owners in Colorado and elsewhere should learn from the Simon decision and go beyond the general remedies available to include specific remedies for specific types of breaches. If a shopping center needs leverage to require a tenant to operate its business, the lease should clearly articulate this requirement and provide the shopping center owner with the requisite remedy.

Second, unlike many retailers shuttering stores to survive, Starbucks is financially sound. Although Starbucks stood to lose about $15 million in revenue if forced to keep its Teavana stores open, Starbucks had over $4 billion of revenue in 2017 and more than $2.7 billion of cash and equivalents on hand. The court noted Starbucks sought closure “simply as a cost cutting measure where the existence of the company was not at issue.” Further, “[C]losure of an underperforming store where the company as a whole was viable could present a scenario where a mall owner would suffer irreparable harm due to the consequences of the closure.” Abandoning an obligation to open and operate a store simply because it is unprofitable contravenes the public policy encouraging parties to act as promised.

Next, the large number of Teavana stores Starbucks sought to close weighed in favor of Simon’s request for specific performance. The court suggested that closing one store in one Simon mall might not suffice because stores like Teavana are not anchor or major tenants that drive foot traffic or the closure of which would create co-tenancy violations resulting in other stores closing. Closing 77 stores across Simon’s portfolio would have a greater impact, however. Shopping center owners are cautioned not to lend excessive weight to the Simon decision unless a chain retailer seeks to close a large number of stores in violation of continuous operations provisions.

Finally, each Teavana store was open and operating at the time of the court ordered them to remain open and operating, and none of them were problem tenants. While courts generally are reluctant to impose “mandatory” injunctions, compelling a party to act in a certain manner, the injunction in the Simon case was a “prohibitory” injunction: It preserved the status quo. Simon was not seeking to compel Starbucks to reopen any of its Teavana stores but was simply seeking to keep them open. The court discarded suggestions that monitoring Starbucks’ operation of these stores would be problematic or burdensome for the court because none of these stores had been a problem tenant to date. Might Starbucks have been better off simply closing these 77 stores without warning?

After watching many retail chains fail during the “retail apocalypse,” the Simon decision could embolden shopping center owners to push back against store closures. The court’s decision provides a detailed analysis of continuous operations provisions and co-tenancy issues and provides guidance for both shopping center owners and retailers alike. It may not, however, give shopping center owners a surefire way to prevent retailers from closing stores prematurely – just as it should warn retailers looking to close selected underperforming stores.

Featured in CREJ’s May 2018 Retail Properties Quarterly.

Edited by the Colorado Real Estate Journal staff.