With the case between Fortius Funds Management and Just Group returning to the NSW Supreme Court this week, Australian retailers could soon find out whether or not it was legal to break their leases by not paying rent in full during Covid-19. Fortius has sued Just Group, the owner of Just Jeans, Jay Jays, Peter Alexander, Smiggle, Portmans and Dotti, for nearly $3.6 million in alleged unpaid rent across four stores in Sydney’s Mid City Centre, plus various fees and interest, dating back
ck to April 2020. However, Just Group, which is owned by Premier Investments, has argued that its inability to trade due to store closures and reduced foot traffic during Covid-19 essentially released it from the obligations in its lease agreements, including rent. “This case may hinge upon an expanded view of the legal doctrine of frustration of contract, where the lessor couldn’t perform its side of the contract and neither could the lessee because of it,” Stephen Spring, a retail leasing expert, told Inside Retail. Frustration of purpose is a common law defense that can be used to void a contract if an unforeseen event occurs that means the principal purpose of the contract can no longer be performed. Fortius and Just Group are just the latest landlord-tenant duo to end up in court over unpaid rent during Covid-19, but based on the handful of decisions that have been reached in similar cases in the US so far, the pandemic may not be reason enough for tenants to get out of their lease agreements. Gap settles with landlord over millions in unpaid rent One of the first major retailers to be sued by its landlord over unpaid rent was Gap Inc, which was taken to court by the largest mall owner in the US, Simon Property Group, in June 2020 for US$66 million in alleged unpaid rent and other charges for the months of April, May and June. Gap countersued Simon Property in July, seeking to cancel hundreds of store leases or, failing that, have its rent waived indefinitely, retroactive from the first store closures in March. Simon Property responded with a second lawsuit in August that claimed the retailer now had US$107 million in unpaid rent. According to Bloomberg Law, Gap’s legal argument was that the pandemic had “frustrated the express purpose of these leases and made their principal object illegal, impossible, and impracticable, all for a period of time that remains unknown and unknowable”. “Even after restrictions limiting operations at the premises are lifted, the conditions under which retailers are expected to operate, and the environment in which they will have to operate, are nothing like what was contemplated and promised,” its claim stated. The two parties settled their lawsuit in December, without disclosing the terms of their deal. Victoria’s Secret, Valentino cases dismissed Lingerie brand Victoria’s Secret made a similar argument when it sued the landlord of its 20,000-square-foot-flagship store in New York City’s Herald Square in May 2020, seeking to cancel the lease or avoid its nearly US$1 million monthly rent obligation. Victoria’s Secret stated in its complaint that the purpose of tendering a monthly rent to operate a retail store “is completely frustrated when that store cannot open… [or] can open at only a marginal capacity”. However, the landlord argued that the lease in question included a clause that specifically stated the retailer was still on the hook for rent in the event of a store closure due to a government order arising out of a national emergency, and the court ultimately agreed. The case was dismissed in January 2021. Similarly, Valentino’s lawsuit against the owner of its Fifth Avenue flagship store was also dismissed in January. The luxury brand was seeking to void its 16-year lease due to Covid, which had made it impossible to operate the store. Since then, the landlord has sued the luxury retailer, which abandoned the store in December 2020, for US$207.1 million, which includes the amount of rent the retailer would have paid through the end of its lease in July 2029, plus US$12.9 million in store damage. Retailers to have the last laugh? But while court rulings so far have tended to favour landlords when it comes to disputes over unpaid rent during Covid-19, Spring believes retailers could still win in the long run. “If the court decides the combined public health risk and the economics of the contract lies with the lessee, the lessors may benefit from that imbalance in the short term,” he said, in reference to Fortius’ lawsuit against Just Group. “But having squeezed the lemon too hard when the greatest health threat in a generation befalls us, the lessors will get pips as new delivery channels evolve and retailers both now and the future move away from bricks-and-mortar.” One thing that is clear? It’s going to be a busy year for real estate litigation.