Crossgates sues Lord & Taylor, Gap countersues mall in back-rent lawsuit

Enterprise file photo — Michael Koff

In August, Le Tote Inc., the then-parent company of Lord & Taylor, filed for Chapter 11 bankruptcy. This week, Crossgates Mall filed a lawsuit against the luxury retailer for $594,407 in back rent, $20 million in damages, and is asking the court to grant an injunction to keep the store from closing at the end of the year.

GUILDERLAND — Crossgates Mall has filed its tenth lawsuit against a tenant for not paying its rent, but this one comes with a kicker — a $20 million damages request.

The mall claims that Lord & Taylor owes it $594,407 in back rent. 

The luxury retailer joins nine other Crossgates tenants — Banana Republic, Old Navy, The Gap, Athleta, Journeys, Underground by Journeys, Journeys Kidz, Ruby Tuesday, and Uno Chicago Grill — which now owe the mall at least a collective $1.9 million in combined derelict lease payments. 

Four of the tenants — Athleta, Banana Republic, Old Navy, and The Gap, all owned by Gap Inc. — had barely paid rent since February, which has led to a collective rent past-due amount through August totaling over $710,000. Earlier this month, the four stores countersued the mall. 

In June 2013, the Oct. 15 court filing states, Crossgates entered into a 15-year lease with Lord & Taylor, which opened in September 2014, that was to run until 2029 and which included “a critically important operating covenant” that extended until 2024. 

Crossgates claims to have invested over $23 million on the “transaction” — including a $14.5-million build-out of the 80,000 square-foot “custom fashion department store retail space,” according to the filing. 

Crossgates claims this is the largest investment either it or its parent company, the Pyramid Management Group, has ever made in a tenant, and, with monthly lease payments of $80,000, “Crossgates also gave Lord & Taylor below-market rent for the entire term of the Lease,” according to court documents. 

With 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. 

All of these investments were made, the court filing states, in pursuit of “mature and high-income customers, traditionally female, who are influencers as to spending-decisions in family units and social groups within the community.”

The lease transaction, according to an affidavit included with the court filing, “was not driven by rent. It was driven by Crossgates’ strategic imperative of obtaining a continuously operational fashion department store tenant.”

In exchange for Crossgates’ multi-million dollar investments and below-market rent, according to the lawsuit, 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 ….”

In August, Le Tote Inc., the then-parent company of the Lord & Taylor filed for Chapter 11 bankruptcy. The court filing says that the store has told employees it will be closing on or before Dec. 31 — it also states that Le Tote submitted filings to the New York State Department of Labor under the Worker Adjustment and Restraining Notifications (WARN) Act, saying it intended to permanently close the store no later than the last day of 2020. 

The operating covenant, according to court papers, “was highly-negotiated, and a fundamental provision of the Lease, without which Crossgates would not have entered into the Lease.”

Crossgates claims it and Lord & Taylor “specifically negotiated the exact remedy for this occurrence,” a bankruptcy and store closing; in that case, “the Defendant Guarantor,” HBC US Propco Holdings LLC, “must immediately step in and ensure compliance with the Operating Covenant.”

“The Guarantor has failed and/or refused to do so,” court documents state.

Crossgates claims that HBC Holdings has breached the operating covenant, and considering the mall made “significant investments and expenditures in the Premises in reliance upon and anticipation of the full performance of the Operating Covenant,” it is asking to be awarded $20 million in damages. 

Crossgates has also asked the court to grant an injunction requiring HBC Holdings “to immediately take all actions necessary to ensure that a fashion department store continuously operates in the Premises in compliance” with the operating covenant.


HBC seeks dismissal

On Oct. 19, HBC Holdings submitted a memorandum of law in opposition to Crossgates’ request for an injunction, asking that it be dismissed because the company “has not breached the Operating Covenant”; Crossgates “merely alleges a threatened default by” Lord & Taylor, “which does not trigger Guarantor’s obligations under the Guaranty.”

HBC Holdings claims Crossgates is asking the court to order it, HBC Holdings, the “guarantor of a retail lease to immediately take some action to prevent” HBC Holdings “from potentially breaching its obligation to operate a Lord & Taylor store at” the mall, “and to prepare to start operating its own Lord & Taylor store” at Crossgates “in case” the holding company “ceases its operations at the end of the year.”

But HBC Holdings says, as a holding company, “it is not an operating entity and does not (and cannot) operate any retail stores,”adding that it “has no right to use the Lord & Taylor name or to operate a Lord & Taylor store.”

The tenth tenant lawsuit comes as Crossgates is in the midst of suing the town of Guilderland in an attempt to cleave $139 million off of its $282 million assessment.

In the tax year 2019, the seven tax parcels listed in Crossgates’ lawsuit against Guilderland collectively paid entities within the town — the school district, the public library, and the town government — about $7 million in property taxes. If Crossgates were to win its lawsuit, the taxes it pays to the town could be cut by about half. 


Gap counterclaims

In an April Securities and Exchange Commission filing, Gap wrote that, in an attempt “to both preserve and provide additional liquidity,” it would stop paying the $115 million in rent the company paid every month on its North American “stores that have been closed because of the COVID-19 pandemic.”  

In June, Gap was sued by the country’s largest mall operator, the Simon Property Group, for nearly $66 million in back rent. Gap in July filed a separate lawsuit against Simon Malls in an attempt to terminate its leases with the property giant; in August, Simon countersued. Gap is embroiled in similar lawsuits with Brookfield Property Partners. 

Earlier this month, the affiliated companies answered Crossgates’ back-rent lawsuits. The Gap-owned companies claim Crossgates’ August complaint “fails to state a claim upon which relief may be granted.”

Gap claims that Crossgates is in breach of its contract for, among other things: 

— Demanding Athleta, Banana Republic, Old Navy, and The Gap pay rent and other expenses that were not owed under their lease agreements. 

Gap, in its counterclaim, states, “In a world of unforeseeable events, the circumstances the store has faced are at the extreme end of unforeseeability.” 

Had Gap “contemplated that it would be prohibited from opening its store to the public” by governmental decree and that the mall would be completely devoid of customers “with no indication of when or if it would ever return to the level of foot traffic that existed when the Lease was entered into, it would never have entered into the Lease,” according to court documents. 

 The circumstances of the pandemic-caused closure “not only imposed a severe and irreparable hardship” on Gap, the court papers allege, “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.”

That is why, Gap claims, the lease itself and the law negate any obligation the store has to pay rent from mid-March, when it stopped paying rent, to the present. As of the start of this year, Old Navy’s rent due was $42,055 per month, according to court papers; Banana Republic was supposed to pay $37,552 per month in rent; Athleta’s monthly rent was about $25,547; The Gap was supposed to pay $49,212 per month in rent.

— “Demanding, collecting, and subsequently failing to reimburse” the stores “for excess charges paid in advance under the Lease before the COVID-19 crisis”; and

— Failing to reimburse pro-rated rent and other expenses to Athleta, Banana Republic, Old Navy, and The Gap for the period the mall closed.

The company claims it is entitled to a refund of the rent and expenses it had paid since March — the four Gap-owned companies have paid at least $138,000 in rent between March and August. And Gap claims it should be “require[d] that the Lease be modified and reformed, or rescinded, canceled, or terminated as a matter of law.”

Crossgates, in its Oct. 19 reply to Gap’s counterclaim, denies the allegations laid out in the Oct. 1 court filings of the four Gap-owned stores.

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