Indiana’s Business Court Issues Covid-19 Decisions (1) Enjoining Tenant from Abandoning the Premises and (2) Prohibiting Landlord from Locking Out Tenant for Unpaid Rent

In two Covid-19 pandemic cases, the Marion County Indiana Commercial Court, located in Indianapolis, issued opinions in connection with commercial leases.  Simon Property Group is the landlord in both cases, but otherwise the circumstances are unique to each matter. Commercial Court Judge Heather Welch ruled in Simon’s favor in one case, but not the other.

Injunction Granted Preventing Business Closure

In Simon Property Group, LP v. Abercrombie & Fitch Stores, Inc., Abercrombie & Fitch (A&F) wanted to close down its stores on 53 properties leased from Simon, in light of the Covid-19 pandemic.  Simon obtained a preliminary injunction preventing A&F from doing so. Focusing on the Covid-19 references, we quote from Judge Welch’s 39-page opinion, a copy of which can be found here.

Simon argues that status quo should be considered the time period around early March 2020 when A&F Stores were operated [sic] their locations under the prior leases and [sic] but paying the newly agreed rent rates prior A&F Stores’ repudiation of their leases.

A&F Stores argue that the status quo was the period just prior to Simon’s filing of suit when A&F Stores were closed and A&F Stores’ leadership had elected to shut down all locations as a result of the COVID-19 emergency.

The Court agrees with Simon and finds that the status quo between the parties should be considered from the period prior to A&F Stores’ March 16 decision to close all locations as that decision led to the present dispute. This time period constitutes the last non-contested status because Simon has challenged A&F Stores’ decision to close their stores permanently. While A&F Stores’ locations were closed at the time of the decision, those closures were largely the result of emergency stay-at-home orders enacted at all levels of government in response to the COVID-19 emergency. Those emergency orders were highly unprecedented actions that impacted nearly all businesses in addition to these parties, and A&F Stores decision to close the locations permanently occurred only days after the issuance of the stay-at-home orders. In comparison, A&F Stores had been operating their locations in Simon malls for a much longer period of time, for years in most cases, and under new the new rent rates for over two months by the time the COVID-19 emergency orders were issued. Because of the relatively greater length of time the A&F Stores operated their locations in Simon malls under the new rent terms compared to the days the COVlD-19 emergency conditions were present prior to filing this suit, the Court finds that status quo should be measured from the parties’ relationship as of February and March of this year prior to the execution of the COVID-19 emergency orders.

Second, the Court finds that the case law provided is not dispositive of the issue of specific performance in those jurisdictions. The Court does not seek to presume how sister courts in other jurisdictions would decide these issues based on these present facts and does not venture to guess. For example, the facts in the Summit Towne decision differ because that involved a smaller brand that was closing one store due to severe financial difficulties. Summit Towne Ctr., Inc. v. Shoe Show of Rocky Mount, Inc., 573 Pa. 637, 644, 828 A.2d 995, 999 (2003). In comparison, A&F Stores is a notable national brand seeking to immediately close 53 stores nationwide in the wake of the COVID-19 emergency. It is difficult to apply broad principles from other jurisdictions when each case is so fact-specific and the burden for Simon to satisfy at this point is lower than at a full trial on the merits of the case.

The Court finds that the current issues surrounding the COVID-19 pandemic further support a finding of irreparable harm if A&F Stores immediately vacates its locations. While the legal impacts of the COVID-19 pandemic on business arrangements are being litigated in forums across the county, there remains significant uncertainty on the long-term effects COVID-19 and the various government restrictions will have on the operation of retail centers across the country.

A&F Stores’ stated reason for closing the locations is specifically due to effects of the COVID-19 pandemic. If a company as finically stable as A&F Stores seeks to vacate all of their locations at once simply in light of the pandemic, the Court finds Simon’s testimony that other tenants would certainly be tempted to vacate or at least consider the possibility that other tenants would suddenly vacate when considering whether to renew their leases highly credible. While recognizing the damages to Simon are speculative to a degree, damages are certain. The indirect effects of a mass store closing coupled with the fallout from the COVID-19 pandemic further supports granting injunctive relief until a final adjudication on the merits can occur because of the uncertainty that a legal remedy would be able to provide Simon full relief at this point.

A&F Stores have argued that imposing a preliminary injunction would likely cost A&F Stores millions of dollars during the pendency of the injunction. A&F Stores would have to locate, hire, and train new employees, make arrangements for seasonally current inventory, and engage in all the other ancillary efforts required to operate these stores across the United States. …. This is in addition to the certain additional expense and risk resulting from the advent of COVID-19 and the huge task of complying with a patchwork of various government orders. The Court understands A&F Stores’ costs in operating while under pandemic conditions will be significant. Still, costs related to operating under COVID- 19 restrictions are being felt by all businesses. Additionally, the Court finds the costs alleged by A&F Stores were costs A&F Stores were paying during the status quo period and do not outweigh the irreparable harm Simon would suffer absent an injunction.

A decision on a motion for summary judgment is now pending in this matter.

TRO Granted Prohibiting Landlord from Locking Tenant Out; Impossibility of Performance

In Simon Property Group, LP v. Pacific Sunwear Stores, LLC, the properties at issue were located in Texas, where Pacific Sunwear (“PacSun”) leased 16 spaces from Simon.  Judge Welch observed Texas’ governor ordered business closures, encompassing both Simon and PacSun.  Simon brought suit against PacSun for unpaid rent over a period on months, and, in addition, Simon changed the locks preventing PacSun from entering the 16 locations after the emergency closure order ended.

PacSun sought an injunction requiring Simon to allow PacSun back on the premises. It argued “that the restrictions put in place by government authorities to address the COVID-19 public health crisis absolved PacSun from paying the rent claimed by Simon.” The only issue before the court was whether Texas law permitted re-entry. A copy of Judge Welch’s ruling can be found here.

Again, solely quoting Covid-19 language from Judge Welch’s opinion:

Prompted by the COVID-19 public health crises, the government of Texas imposed restrictions on the operation of non-essential retail businesses on March 13, 2020.

PacSun now seeks an injunction to compel Simon to allow PacSun to reenter its Texas properties on the basis that the restrictions put in place by government authorities to address the COVID-19 public health crisis absolved PacSun from paying the rent claimed by Simon.

Simon additionally directs the Court to similar clauses that purport to obligate PacSun to continue paying rent regardless of any “other reason of a like nature not the fault of the party delayed in performing work or doing the acts required under this Lease,” … or despite “action by any government entity.” …. Regardless of any COVID-19 related restrictions imposed by the Texas government, Simon argues that the leases PacSun was still required to pay its minimum rent even when the stores were closed. By failing to do so, PacSun is delinquent.

The COVID-19 pandemic has had unprecedented effects on nearly every facet of the public and private lives of Americans. The effects of both the COVID-19 disease and the public health responses to it on the national economy have sent profound shockwaves throughout all facets of the commercial sector. Courts around the country are grappling with how the monumental impacts of the COVID-19 crises are affecting arrangements between businesses and other service providers who entered into deals without ever entertaining the possibility that the performance would be interrupted by a global pandemic.

Due to the unprecedented nature of the disruption, the Court provisionally finds that PacSun’s impossibility defense satisfies the likelihood of success factor by providing a prima facie case where performance under the leases was impossible, discharging PacSun from the obligation of paying rent to Simon during the relevant period.

The Court understands Simon’s argument that the enforced closures of the mall did not last for the entire period for which Simon claims PacSun owes rent. The Court is willing to hear further evidence on this point at the preliminary injunction hearing and reconsider its position should PacSun be shown to be delinquent on its rent and subject to a lockout under Tex. Prop. Code § 93.002(c).

Based on the foregoing analysis, the Court hereby GRANTS PacSun’s Motion for TRO against Simon. Simon is thereby ordered to make the new keys to the sixteen PacSun stores in Texas available to PacSun by no later than midnight on June 26, 2020.

Shortly after this ruling, Simon voluntarily dismissed the case.

Posted by Lee Applebaum