Crossgates’ suits for back-rent mount as more businesses fold

The Enterprise — Michael Koff

Zaitoon Kitchen, located in the Pyramid-affiliated Crossgates Commons on Washington Avenue Extension, shut down at the end of last year just two years into a 10-year lease.

GUILDERLAND — Amid the recent loss of a major retailer, tenant lawsuits over back-rent, and an impending assessment showdown with the town of Guilderland, Crossgates Mall secured a $210,000 contract from New York State to host a COVID-19 vaccination site for three months in a space previously occupied by a bankrupt luxury retailer that is currently being sued by the mall for $20 million for breaking its lease. 

The financial fallout from the pandemic may not be as dire for small businesses as once thought, but the news rings hollow for one industry with a foundation built on some of the hardest-hit sectors of the economy.

A study released by the Federal Reserve in mid-April said that, in a normal pre-pandemic year, approximately 600,000, or 8.5 percent, of existing businesses closed permanently every year. The pandemic increased that number by approximately 200,000 in 2020.

For the nation’s shopping malls, built on brick-and-mortar retailers, food courts, and fast-casual restaurants — areas of the economy decimated by COVID-19 — the pandemic has had a deleterious effect on their bottom lines.

Tenant vacancy rates in the nation’s malls hit a record high, at 11.4 percent, in the first quarter of 2021, according to Moody’s Analytics, up from 9.2 percent a year ago, when 84 percent of the nearly 1,200 malls in America reported vacancy rates of 10 percent or less. Credit-rating agencies DBRS Morningstar and Fitch placed Crossgates Mall’s occupancy rate in 2020 at about 86 percent, down 2 percent from 2019. 

 

Crossgates’ clawback 

Since August of last year, Crossgates has filed lawsuits against 15 of its tenants for millions of dollars in unpaid rent. While just down Washington Avenue Extension, another property, Crossgates Commons, which is owned by the mall’s parent company, Pyramid Management Group, has filed suit against two tenants.

Pyramid has had a tough time during the pandemic. 

In April, The Wall Street Journal reported the company was struggling with its $716 million in loans and bonds held on the Destiny USA Mall in Syracuse, and had begun looking for ways to deal with the debt. The Journal also reported that 11 Pyramid-affiliated malls had missed debt payments on the $1.2 billion in collective loans backed by their properties. 

In the ensuing months since the first complaint was filed, Crossgates Mall has entered into negotiations with five tenants over repayment; consolidated four suits into one and is moving forward with discovery in the case; and is in various stages of litigation with the remaining tenants, some of whom are no longer occupants of the mall.

 

World of Beer

Malls in New York State were shut down by governmental decree between mid-March and early-July of last year. When they were allowed to reopen, the World of Beer never did.

The tavern and restaurant was only in the third year of a 10-year lease agreement with Crossgates when it stopped paying its $30,000-a-month rent in April 2020. 

Crossgates filed suit in December 2020 for close to $227,000 in back-rent, and World of Beer, a Florida-based company, went on to ignore the summons and complaint for over a month, taking another six weeks to respond and only doing so after the two sides came to an agreement about a response date.

When World of Beer did respond, in March, it argued, in so many words, that Crossgates was having its cake and eating it, too — holding its tenants to their lease agreements while simultaneously blaming the pandemic for its own financial woes. 

The restaurant dinged the mall for taking such a hard line on rents in light of its “action currently pending” in Albany County Supreme Court: An attempt to cleave $139.2 million from its $282.5 million tax assessment “based upon the condition of the Property having been and continuing to be adversely affected by the COVID-19 pandemic.”

World of Beer argued the “express purpose” of its lease was to allow the tavern to use its space as a full-service, sit-down restaurant. But executive orders limiting restaurant hours of operation, staffing levels, and the months-long  closure of malls made that impossible. 

Like many of the tenants it is suing for back-rent, Crossgates stopped paying its own bills when the pandemic hit, entering delinquency in May 2020.

But unlike its tenants, Crossgates’ creditors granted it forbearance on its loans; the mall had missed $10 million in principal and interest payments on its $261 million mortgage during the pandemic. In June of last year, Crossgates received a four-month forbearance on its regular monthly loan payments and six months of relief before having to start to pay back all the debt accrued during the pandemic. 

On April 14, Crossgates terminated World of Beer’s lease and filed an amended complaint on April 26, seeking a $2.95 million judgment against its former tenant for $1.84 million in future lease payments; $344,000 in back-rent; $94,000 from a tenant-improvement allowance; and a whopping penalty written into the lease agreement that entitles Crossgates to a percentage of World of Beer’s unexpired lease term, which translates to $674,000.

World of Beer has yet to respond to the mall’s latest court filing.

 

Suits moving forward

Crossgates filed four separate suits against the Gap-owned stores in August of last year. The four tenants — Athleta, Banana Republic, Old Navy, and The Gap, all owned by Gap Inc. — had barely paid rent since February 2020, which led to a collective past due amount totaling over $710,000 as of August 2020.

In addition to the back-rent it is owed, Crossgates was also seeking “any unpaid rent that accrues” from its four tenants “while [the] action is pending,” the mall’s court filing states. The four stores pay $153,000 in collective monthly rent. 

The circumstances of the pandemic-induced closure “not only imposed a severe and irreparable hardship” on Gap, its court papers alleged, “they frustrated the express purpose of the Lease and made the principal object of the Lease illegal, impossible, and impracticable, all for a period of time that remains unknown and unknowable.”

Gap claimed the lease itself and the law negated any obligation the company had to pay rent from mid-March 2020, when it stopped paying rent, to October of last year, when the company responded to Crossgates earlier court filing. 

Last month, the Gap-owned companies agreed to consolidate their four lawsuits into a single suit.

Crossgates and Gap also have a discovery stipulation in place that says, after all the depositions have been taken and documents are handed over, a “note of issue” is filed with the court and the case gets placed on the trial calendar — Gap’s note of issue isn’t scheduled to be filed with the court until December.

 

Lord & Taylor

Still out there is a Crossgates’ lawsuit against an anchor tenant that no longer exists — the bankrupt Lord & Taylor that shut down permanently at the end of last year.

In October 2020, the mall filed a lawsuit against the luxury retailer for $594,407 in back rent, which is now $486,685.44, while also requesting $20 million in damages.

Crossgates in 2013 signed a 15-year lease with Lord & Taylor that was to run until 2029 and which included “a critically important operating covenant” that extended until 2024. 

Crossgates claimed to have invested over $23 million on the deal, including a $14.5-million build-out of the 80,000 square-foot “custom fashion department store retail space,” according to the mall’s earlier court filing. With below-market annual rental payments of $960,000 a year, Crossgates would have taken in $14.4 million over the life of the 15-year lease — an approximate $8.6 million loss on the mall’s initial $23-million investment. 

In exchange for Crossgates’ multi-million dollar investments and below-market rent, Lord & Taylor agreed to an operating covenant, which required the store “to continuously operate a fashion department store in the Premises for no less than 10 years ….”

The judge in the case tossed the $20 million damages request in February while allowing the unpaid rent portion of the lawsuit to proceed, but Crossgates amended its original complaint a few days later and refiled it with another $20 million request for damages.

The lawyers for the holding company now overseeing Lord & Taylor’s assets responded in March, arguing the “amended claims are either the same as the claims that this Court previously dismissed — and, thus, plainly improper — or the claims are new, in which case … is inapplicable.”

The vacant Lord & Taylor store is the space that the state is using for a mass-vaccination clinic, moved from the uptown University at Albany campus, with a contract that runs from March 30 to June 29, for $210,000.

 

Restaurants  

Revenue from food services and drinking places dropped by $173 billion during the worst of the pandemic, April through June of last year, compared to the same period in 2019, according to the federal government’s Bureau of Economic Analysis

The last six months of 2020 were marked improvements over the industry’s second quarter and helped the industry recover somewhat for the year, with 2020 receipts about 15 percent below what they were the year prior — from $1.93 trillion in 2019 to $1.64 trillion in 2020, according to the Bureau of Economic Analysis. 

One estimate says approximately 10 percent of the nearly 779,000 restaurants that existed pre-pandemic have closed permanently. 

Ruby Tuesday’s was sued by Crossgates in September 2020 for about $155,000 in back-rent in addition to “any unpaid rent that accrues while [the] action is pending,” according to the mall’s court filing; the restaurant paid nearly $26,00o per month in rent.

Ruby Tuesday’s, which is no longer operating at the mall, responded to the Crossgates’ summons and complaint by submitting the October 2020 bankruptcy petition filed with the United State District Court in Delaware, and nothing else since. 

The Standard Supper Club was sued by Crossgates for about $179,000 in back-rent at the end of last year. The mall was also seeking payment for any unpaid rent that’s accrued while the case is pending — Standard Supper Club rent is approximately $21,000 per month. The clock on the unpaid rent accrual began ticking in November of last year.

Crossgates is also seeking unpaid rent from the owner of three other mall restaurants — Berry and Berry, Cajun Café, and Magic Wok. The suits, filed in February, are for over $340,000 in collective back-rent that were owed through January.

The mall is also looking for payment of a $50-per-month late fee owed by each restaurant for every rental payment missed. Crossgates is also seeking interest on past-rent due, which would tack on an additional 18 percent for the year for each tenant, or 1.5 percent for each month’s rent missed.

 

“Without prejudice and without costs” 

Crossgates has agreed to discontinuances “without prejudice and without costs” in five tenant lawsuits. This allows the mall and its tenants to negotiate over the past-rent due, but keeps the content of the communications from being used in future court proceedings, save for issues related to determining costs. 

In August of last year, Crossgates filed three lawsuits against Genesco Inc., the parent company of Journeys, Journeys Kidz, and Underground by Journeys, for non-payment of rent. The three shoe retailers together owe a past-rent due amount through August 2020 of about $162,000. The three cases were discontinued in November 2020 “without prejudice and without costs as against” each of the tenants. 

 Crossgates in October 2020 sued Pizzeria Uno for six months of unpaid rent totaling $229,000. The case was discontinued on May 4.

In February, Popeye’s Chicken was sued for approximately $83,000 in unpaid rent, and the case was discontinued on May 4.

Also in February, a complaint was filed against Intouch Wireless for $183,000 in unpaid rent. The wireless retailer never responded in court to the complaint, which received a discontinuance on April 1.

 

Neighbor problems

At the end of last year, Washington Commons — the Pyramid-affiliated limited-liability corporation owner of Crossgates Commons — filed suit against Zaitoon Kitchen for about $54,000 in unpaid rent. 

In January, Crossgates Commons filed an amended complaint for $922,000 in damages, because on the third-to-last day of 2020, Zaitoon Kitchen sent a letter notifying Crossgates Commons it would be handing back its keys two years into a 10-year lease. 

According to its lease agreement with Zaitoon Kitchen, Crossgates Commons claimed it was still owed $54,000 in unpaid rent, as well as $560,000 that would have come from future rent payments, and $309,000 because of a contract stipulation that entitles Crossgates Commons to a percentage of future lease payments.

Zaitoon Kitchen argued in its response that it had been “prohibited from operating” its business due to government-imposed pandemic restrictions and Crossgates Commons’ “own actions.”

Zaitoon Kitchen said in its court filing that the “express terms” of its lease agreement state “a casual, dine-in restaurant” is to be operated at the site, and that it had requested either a rent reduction or an agreement where Crossgates Commons would receive a percentage of sales instead of rent to allow the restaurant “to stay in business.” 

But the landlord wouldn’t begin to talk about a rent solution until Zaitoon Kitchen “transformed its business model” and switched to a take-out restaurant.

The restaurant provided Crossgates Commons with sales records to “demonstrate the financial desperation of their business and that it could not continue to operate at a loss month over month due to the COVID-19 pandemic,” but the landlord “refused to provide relief and demanded full payment of all rents and expenses, even when advised that such a demand was not only inequitable unjust enrichment but would force Defendants to close their business.”

In February, Crossgates Commons filed a lawsuit against arts-and-crafts retailer Michael’s for close to $41,000 in unpaid rent. 

In its response, Michaels stated that, “since the inception” of its lease agreement, in 1999, “until mid-March 2020, Michaels continuously maintained the Premises and was open and conducted ordinary operations as an arts and craft store at the Premises, pursuant to the Lease.”

The company paid its March 2020 rent in full, Michaels stated in its response. But with the outbreak of the pandemic, the store had to close to the public “in order to comply with applicable governmental orders and guidelines.”

Governor Andrew Cuomo’s subsequent stay-at-home orders kept the store closed until June, the company stated in its response. “Accordingly, Michaels did not pay rent for the months of April or May.” And even with “the reduced capacity restrictions under which it is still operating,” Michaels had paid full rent every month since reopening last June, the retailer said in its March court filing. 

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