Reading Tea Leaves

January 2018

In late November 2017, an Indiana Superior Court judge filed an order in a dispute between Simon Property Group and Starbucks, requiring Starbucks to keep 77 of its Teavana stores open and operating in Simon’s malls across 26 different states.  Starbucks had previously announced its plans to shutter all 379 of its Teavana locations (a brand it acquired in 2013), citing low performance.  The announcement prompted Simon to file a Motion for Temporary Restraining Order and Preliminary Injunction to compel Starbucks to continue operating these stores.  The court’s order granting Simon’s request was surprising to many—especially given that, by the court’s own admission, it appears that no other court has ever granted an injunction to specifically enforce an operating covenant against a non-anchor tenant.

Starbucks acknowledged that closure of the stores would be a clear breach of their leases with Simon.  All of the leases expressly required Teavana to continuously operate and conduct business from the premises (a common provision in any retail lease), and 72 of the 77 leases specifically stated that the landlord had the right to obtain specific performance by the tenant if the tenant failed to continuously operate as required.  In its testimony, Simon noted several potential harms Simon would suffer if the Teavana stores were closed early, including unexpected vacancies in Simon’s malls (which could take as long as 3 years to fill), a less successful tenant mix in the mall as a whole, and other unexpected and unbudgeted costs.

Interestingly, Simon had tried to obtain this kind of a judgement from the same judge against two other tenants that were closing stores early in violation of their lease terms—Kenneth Cole and Wolverine World Wide—but Simon was not successful in those cases.  The key to the judge’s decision in this instance seemed to be the financial strength and viability of Starbucks as a whole, notwithstanding that the Teavana stores were under performing.  In the prior two cases, closing stores was critical to the future viability of the companies and when the court balanced the harm the tenants would suffer by continuing to operate unprofitable stores against the potential harm to Simon, the harm to the tenants was deemed to be greater than the harm to Simon.  In contrast, Starbucks is one of the most successful companies in the world, and the court suggested that Starbucks is in a better position to absorb the costs of continuing to operate its Teavana stores than Simon is to bear the consequences of those stores closing prior to the lease expiration dates.  The court saw Starbucks’ decision merely as a cost-cutting measure, and not a necessary action to save the company.

The court also considered the message it would send to other tenants if a company like Starbucks (which is still hugely profitable) were allowed to stop operating its stores regardless of the terms of the leases they had signed—the court stated that if Starbucks was allowed to close its Teavana stores, it would “signal to Simon’s remaining tenants that the Continuing Operating Covenants will likely never be enforced,” and potentially cause other tenants to pursue the same strategy.

The Indiana Supreme Court agreed to take an emergency appeal of the case directly from the Superior Court (thereby passing over the state’s Court of Appeals), but recent reports have suggested that Simon and Starbucks have settled the dispute, so the Indiana Supreme Court won’t get a chance to weigh in on the matter after all.