Retail landlords are sending out thousands of default notices to tenants, a situation that could tip already-ailing retailers into bankruptcy or total collapse.
Department stores, restaurants, apparel merchants and specialty chains have been getting the notices as property owners who’ve gone unpaid for as long as three months lose patience, according to people with knowledge of the matter and court filings.
“The default letters from landlords are flying out the door,” said Andy Graiser, co-president of A&G Real Estate Partners, whose firm works with retailers and other commercial tenants. “It’s creating a real fear in the marketplace,” Graiser said.
Pressure from default notices and follow-up actions like locking up stores or terminating leases was cited in the bankruptcies of Modell’s Sporting Goods and Stage Stores Inc. Many chains stopped paying rent after the pandemic shuttered most U.S. stores, gambling that they could hold on to some cash before landlords demanded payment.
The stakes are enormous, and landlords are suffering, too. An estimated $7.4 billion in rent for April hasn’t been paid, or about 45% of what’s owed, according to data analyzed by CoStar Group.
“If the landlords don’t put a pause on their actions, you’re going to see more bankruptcies,” Graiser said.
To be sure, not every default letter is followed by a padlock on the door. In some cases, landlords are sending letters just to preserve their legal rights while they talk with their tenants.
Simon Property Group Inc. says it’s in discussions with merchants at its malls and trying to take into account their financial status, market position and the depth of their relationship. “The bottom line is, we do have a contract and we do expect to get paid,” Chief Executive Officer David Simon said during the company’s May 11 earnings call.
But the landlords are stuck with their own bills and bank debts to pay. By some measures, they’ve already been more than patient. Normally, they’d send out default notices as soon as 10 days after missed payments, rather than waiting weeks or months.
“The landlords do have the legal contract,” said Vince Tibone, a senior analyst at Green Street Advisors. “However, from a practicality standpoint, a lot of these retailers are on the brink of bankruptcy and simply cannot pay right now.”
Batches of default notices went out to Stage Stores before it filed for court protection this month, according to court papers. It didn’t pay rent in March, April or May after shuttering its stores and furloughing almost all its staff.
The letters began arriving in March and early April, “but the rate of such notices picked up materially in late April and early May,” Stage Stores said. Some landlords began locking the company out “and threatened to evict the debtors and dispose of the in-store inventory.”
“Responding to and managing these default notices and related litigation outside of Chapter 11 would have been a monumentally difficult task,” Stage Stores said.
For those already weighing bankruptcy, shutdowns caused by the pandemic upended normal calculations. Filing for Chapter 11 allows retailers to reject unwanted leases, but they’re also required to keep paying rent during the process until the court approves the cancellations.
That’s hard to do with little or no revenue coming in because of the pandemic shutdowns. Even if the stores can open, consumers may be hesitant to shop, making it hard to raise cash from stores that are meant to survive the bankruptcy or from going-out-of-business sales.
Retailers need adequate liquidity at the start of a bankruptcy case to keep operating, Graiser said, and if they have to pay rent while their stores are shuttered, the odds of emerging decrease.
“It’s not like there’s a lot of investors out there looking to buy retailers in a Chapter 11,” Graiser said. “Landlords and retailers need to really come together and realize that this a shared pain.”
Some landlords get it, according to Tom Mullaney, managing director of restructuring at Jones Lang LaSalle Inc., the real estate services firm. Retailers he represents are getting default letters that are understanding and sympathetic; other landlords strike a more combative tone.
What’s more interesting is the action, or lack of it, by the landlords afterward, Mullaney said. “In a lot of cases, the letters that are being sent aren’t being followed up on,” he said -- the landlords are simply preserving their legal rights.
That said, some property owners have run out of patience and have locked out Mullaney’s clients.
“The environment is getting pretty testy and emotional on both sides of the table,” he said. “The only thing worse than being a retailer right now is being a retail landlord.”
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