Before the advent of Covid-19 retailers were being negatively impacted by online purchasing.
Major box stores such as Macy’s, Sears, and Kmart closed large numbers of stores throughout the country, while JCPenney and Neiman Marcus have filed for bankruptcy.
In a July 5, 2020 New York Times article, it was stated that analysts see as much as a quarter of America’s malls closing over the next five years. It is no great surprise that the confluence of events, online shopping and COVID-19, are likely to accelerate that downslide.
In an attempt to provide some insights to what is occurring, I thought we should look at some of the issues that are having a cascading impact on shopping malls that began to come into existence after inner city populations started to migrate to the suburbs post World War ll. The G.I. Bill provided financial assistance to purchase homes and the development of expressways contributed to the migration. Soon, the shopping malls followed. Investors saw the opportunities that this offered.
The process of the development of suburban malls starts with finding a site large enough to accommodate a large number of retailers, determine the costs of development including purchasing the property, financing, taxes, hard and soft costs, zoning, and, most crucially, determine if the purchasing power of the intended customer base will be sufficient to return a profit on the investment.
Key to the success of the development is the attraction of the anchor tenant such as a Macy’s, JCPenney or Neiman Marcus that will attract other tenants. The developer charges a rent to the anchor tenant at less than the cost to the developer and charges a rent to the other tenants that includes the loss the developer is taking on the anchor tenant.
Commercial leases, like all leases, are contracts that define the obligations of the parties, and unlike residential leases are long-term, from ten to fifteen years, sometimes longer. Because they are long-term, real estate brokers and attorneys who prepare these leases include all the “what ifs” they know shall or may occur. Also unlike residential leases, there are no common law rights pertaining to sublease and assignment as there are with residential leases in New York.
Having set the overall picture, let’s look at how COVID-19 can impact these carefully constructed agreements.
What if the anchor tenant vacates the space? Can the tenants located next door and those down the line who rented that space because of the benefit of being located there and are now suffering a loss of business get a reduction on their rent? Can they sublet their space or assign their lease to another tenant? What rights does the landlord have? Does the landlord have a lease with another tenant prohibiting the sublease or assignment to a tenant who operates the same kind of a business? What if the lease was based on a flat rent plus a percentage of gross receipts and now the gross receipts have declined below what was reasonably anticipated? Where does that leave the landlord who still has expenses to pay?
All of these issues and many more depend upon the written lease, and the inability of either party to comply with the terms of the lease would have to be modified by mutual agreement or seek remedy through the courts.
Given the magnitude of the problem and their unforeseen circumstances, how will the courts respond?
These circumstances and what they may portend have given rise to another question? Might we see a resurgence of the small businesses that once characterized our neighborhoods?
Only time will tell.