Not Their Cup of Tea

“More tea please!” – something you can still say at 77 Teavana stores in the United States as a judge recently granted a preliminary injunction in favor of Simon Property Group, L.P., halting the closure of Starbucks’ well-known tea retailer found within many Simon malls.

In the August 2017 proceeding (just one month after Starbucks’ announcement), in front of the Marion County Superior Court in Indiana, Simon argued that Teavana’s shuttering would be a direct breach of what are known as “continuous operations covenants” found within the lease agreements between Simon and Starbucks. Before this decision, no court had ever granted injunctive relief to specifically enforce a continuous operations covenant against a non-anchor shopping mall tenant extending nationwide.

Shopping center leases essentially establish co-dependencies between the various tenants and the landlord. Continuous operations covenants are placed within a lease agreement in order to provide assurances to the landlord and to the various other tenants that the obligated tenant under the lease will remain open and operating in the shopping center during the entire term of the lease.

Simon argued that if the court found in favor of Starbucks, any attempts by Simon to enforce the continuous operations covenants against any of its other tenants, across its entire platform, would be rendered futile. The argument Simon made is an interesting one with greater implications across the industry than just the effect on the Teavana stores within the Simon malls. The court took a unique approach and viewed the implications of a preliminary injunction from a company-wide perspective, taking into consideration the entire scope of company operations, business models and business platforms of both companies.

Simon contended that Starbucks, valued at $84 Billion, is much better positioned to keep the Teavana stores open, despite Starbucks argument that the stores are consistently losing money and are an overall financial burden.  Simon has a unique approach for bringing tenants into the malls it operates, by a process it calls curating a “tenant mix.” That is, a mix of tenants, tailored for that specific property that complement one another and are tailored to a specific clientele. If tenants were allowed to leave in violation of their leases, the landlord’s strategically planned tenant mix would be disrupted, and its ability to rely upon long-term leases would be diminished. The court acknowledged that if it did not grant the preliminary injunction, Simon would have to contend with a “sudden influx” of unoccupied retail space across its portfolio of malls, a damaged bargaining position related to negotiating rental rates, the reduced power to hold a potential tenant to continuous operation and the ability to promise a desired mix of tenant properties.

In its reasoning, the court stated that a closure of a single Teavana store would be vastly different than the closure of the great number of stores proposed by Starbucks. Additionally, the far-reaching implications across other Simon platforms required the court to make its decision within a broader context. Using this broader context in determining if a preliminary injunction should be granted, the court found that the injuries to Simon would be greater than the injuries to Starbucks, after analyzing the applicable legal test for preliminary injunctions. While the court did acknowledge that Starbucks may incur monetary and operational challenges relating to keeping the Teavana stores open until the final disposition of the lawsuit, it concluded that the burden should be on Starbucks rather than on Simon. The court noted that those challenges were “self-imposed by Starbucks” when it made the business decision to acquire  the Teavana stores, assumed and entered into leases with, and then unilaterally announcing the closing and winding down operations despite the leases containing continuous operations clauses.

While the court’s decision will keep Teavana stores in Simon-owned malls open for now, this decision will be reviewed by the Indiana Supreme Court which, on December 19, 2017, took an unusual step and agreed to hear a direct appeal from the Marion County Superior Court decision.  If upheld on appeal, this decision is likely to have greater implications across other brick-and-mortar retail platforms, shopping center operators and landlords. In 2017 alone, approximately 6,800 brick-and-mortar stores closed in what has been dubbed by many as the year of the “retail apocalypse.”