- Pennsylvania Supreme Court Denies Stay-Open Injunction Against Shopping Center Tenant
- October 31, 2003
- Law Firm: Blank Rome LLP - Philadelphia Office
The Pennsylvania Supreme Court has reversed the Superior Court and held that a shopping center owner had not met the legal burden needed to require a shoe store to stay open. Summit Towne Centre, Inc. v. Shoe Show of Rocky Mount, Inc., 2003 Pa. LEXIS 1245 (Supreme Court of Pa., July 21, 2003). In that case, the Superior Court had reversed the trial court's conclusion that the owner, Summit, had not satisfied the "essential prerequisites" for a preliminary injunction.
Precedent requires that all of the following prerequisites must be met:
- Injunction must be necessary to prevent immediate and irreparable harm that could not be compensated by damages.
- Greater injury would result from refusing an injunction than from granting it.
- The injunction will properly restore the parties to their status as it existed earlier.
- The owner must show that it is likely to prevail on the merits.
The trial court had found not only that Summit had failed to prove immediate and irreparable harm, but also that it had an adequate remedy at law, and that the injunctive relief sought would disproportionately harm Shoe Show. In ruling for the tenant, the Supreme Court gave deference to the trial court's conclusion.
The lease required the tenant to pay both a minimum rent and percentage rent for the ten-year term. It also contained a "use" provision which required the property to be used for a "first-class" modified rack family shoe store specializing in retail sale of brand named dress, casual, sport and work shoes, as well as handbags, hosiery and other related accessories. The tenant acknowledged that the landlord depended on the described use to maintain the center's desired tenant mix.
The lease also required the tenant to keep the store "continuously and uninterruptedly" open for business during defined hours and to maintain "substantial stock of merchandise and a sufficient number of employees for the purpose of selling said merchandise¿" In addition, it provided that during the entire term, no part of the store would be abandoned or left vacant.
The trial court held that the owner could not require Shoe Show to stay open because the losses that Shoe Show sustained for two years were approximately $100,000 each year, and the anticipated losses for the following year would approximate $122,000. In addition, it had ceased its operations and the estimated cost to refit the store and to start up the business would be $273,000.
The lease had provided the landlord with other remedies. If the tenant vacated, the landlord would have a right, not only to collect the fixed annual minimum rent, but also 115% of the greatest amount of any percentage rent payable by tenant in any lease year, and additional sums specified in the lease. This extra rent was referred to as "liquidated damages". These remedies were to be "cumulative" and were not to be "exclusive at law or in equity of the rights and remedies which landlord might otherwise have by virtue of a default under this lease..."
On appeal the Superior Court had analyzed the testimony and held and that the monetary damages would be inadequate to repair the harm which would be caused by the premature departure of the shoe store, and that the injunction would not be disproportionately harmful to the tenant. Summit had presented evidence that the rest of the shopping center was economically dependent on this shoe store and that when one or two stores vacate it creates "a domino effect." That is, other tenants in the center begin to question the landlord's determination and ability to enforce leases and tenants become concerned about whether the center will remain a viable location for their businesses. They may want to re-negotiate the terms of their leases or may refuse to renew at all. Also the Superior Court determined that Summit would have a difficult time leasing the vacancies and that a monetary award would not adequately compensate Summit for its loss of credibility and reputation resulting from the vacant store.
The Superior Court held that the liquidated-damages clause would not make up for the damage to the landlord's credibility with tenants and prospective tenants, and for the damage to its ability to attract customers.
In reversing the Superior Court, the Supreme Court agreed with the tenant's arguments that the trial court's decision was "reasonable," and that the Superior Court "conducted what amounted to an improper de novo review of the record, and in doing so, erroneously credited the testimony of Summit's witness after the trial court had rejected that testimony as speculative." The Supreme Court criticized the Superior Court for getting too much into the "merits of the controversy," rather than merely looking for whether there were any "apparently reasonable grounds for the action of the court below."
In reaching this conclusion, the Supreme Court stated:
Finally, the trial court's conclusion regarding the balance of harm is supported by the record because Summit did not contest the minimum $394,819 in losses and reopening costs presented by Shoe Show and, as noted above, failed to present the trial court with particular evidence of its own harm to be weighed against Shoe Show's . . . .
In conclusion, there were "apparently reasonable grounds" supporting the trial court's refusal of the preliminary injunction because the record supports the trial court's conclusion that Summit's harm was speculative in nature, that it had an adequate remedy of law, and that Shoe Show would have sustained more harm than Summit had an injunction been entered. Accordingly, the Superior Court erred in reversing the trial court's order denying injunctive relief.
Among other things, the Supreme Court agreed with the trial court's conclusions that Summit's sole witness failed to demonstrate that its alleged harm was "anything other than speculative," and that he did not specifically demonstrate how Shoe Show's absence was actually affecting the other "independent" stores. Also, Summit had not presented any evidence regarding vacancy rates both before and after Shoe Show had departed. Furthermore, the trial court emphasized that the shoe store of 5400 square feet occupied less than one percent (1%) of the Centre's 550,000 square feet of space.
The Supreme Court also rejected the Superior Court's conclusion that it was inappropriate for the trial court to consider Shoe Show's reopening costs because such expenses were caused solely by Shoe Show's "wrongful" departure from the Centre. It pointed out that Summit had been notified on or about January 4, 2000 of Shoe Show's imminent departure, and yet it did not promptly seek an order in equity to prevent its occurrence. Rather, it waited until over six weeks had elapsed and Shoe Show had long departed to file its petition for a preliminary injunction. Therefore, because Summit failed to take "swift action" to prevent that departure, it cannot now complain that "the natural consequences of that departure were considered in the trial court's equity calculus"
One of the underlying policy issues courts must decide when they are asked to enforce "stay-open" provisions in a lease, is whether a court wants to be placed in the difficult position of trying to enforce operating terms in a lease. To put it in shoe terms, will a court be able to "walk the walk"?
If Shoe Show were required to continue to operate in an atmosphere where it was losing money every year, it would probably do whatever it could to keep expenses down. The court might then be compelled to enforce the day-to-day standards which require the tenant to maintain "a substantial stock of merchandise and a sufficient number of employees." Also, it would have to compel the operation of a "first-class" "family shoe store" -- whatever that means.
In addition, from a tenant's perspective, an injunction to stay open can be disastrous. If a number of years are left on a lease, and the tenant must continue to operate at a location where it is losing an increasing number of dollars each year, it could easily go bankrupt. That's why tenants try to avoid continuous-operating clauses. Even without an injunction, the landlord could still recover substantial damages. That's why tenants try to negotiate an exit strategy in a lease. For example, they might agree only to open and not to operate for any given time. Or, they might try to limit the required operating period to only their first few years of a lease or to provide for the right to terminate under specified conditions, such as suffering an annual operating loss of a specified amount over a period of two or three consecutive years.
Liquidated-damages clauses may help both landlords and tenants by making it easier to calculate damages incurred when a store "goes dark," but the Superior Court was not persuaded that that provision gave the landlord an adequate remedy at law.
From a landlord's perspective, the inability to enforce stay-open provisions under certain circumstances could prove troublesome. If a key tenant, such as a major department store, closes, that might give other tenants a right to terminate and could drag down the whole shopping center in a way that would be difficult to measure.
Tenants should consider the value of negotiating a liquidated damages clause. Without such a clause, a landlord might try to assert damages, not only on the basis of lost rent and other charges, but also on the lost value to the shopping center itself. Harris Ominsky "Calculating Damages When the Anchor Breeches," The Legal Intelligencer, July 23, 2001, Vol. 225, No. 14, p. 11.