Victoria’s Secret is seeking to tear up one of its largest and most expensive retail leases, using the Covid-19 crisis as a legal justification to break from the obligation.
The lingerie and apparel chain and its parent company, L Brands, filed a summons of notice in New York state court on Monday that it intends to launch a court battle to cancel its lease for an over 20,000-square-foot store it occupies in Manhattan’s Herald Square. Victoria’s Secret pays over $10 million a year in rent for the space, according to court documents, making it among the chain’s most-costly single leases in an expansive portfolio of stores, according to real estate experts.
A summons of notice is a filing that precedes a more detailed complaint — and was interpreted by some observers as a way to threaten to sue without committing to costly litigation in an effort to negotiate with its landlord at the location, the real estate investment trust SL Green. An attorney for SL Green stated that negotiations between the two parties previous to the filing had been unfruitful.
“SL Green has made several approaches to this tenant with offers to defer a portion of its rent at 2 Herald Square,” said attorney Stephen Meister, who is representing SL Green in the lease dispute. “Instead, this large national, publicly-traded conglomerate is exploiting the current health and economic crisis for its own financial gain rather than honor its contractual rent obligations — all at the expense of the local real estate tax base and the fiscal health of New York City.”
Victoria’s Secret did not immediately respond to a request for comment.
The Victoria’s Secret store, at 2 Herald Square, like much of the rest of the city’s non-essential retail space, has been shuttered for the past two months since New York Governor Andrew Cuomo issued an executive order imposing a statewide lockdown to combat the pandemic.
The legal action to shed the commitment comes after the struggling brand announced it will seek to close a quarter of the roughly 1,100 stores it operates in North America. At the beginning of the month L Brands also agreed to scrap a plan to sell a majority stake in Victoria’s Secret to the retail-focused private equity firm Sycamore Partners for $525 million after the economics of the deal were derailed by the virus crisis.
The effort to cancel the lease at 2 Herald Square shows the fading allure of what were once flagship urban retail locations in the wake of the pandemic as questions linger when — and even if — commerce will return to normalcy even in bustling economic centers like Manhattan.
Victoria’s Secret’s problems predate the Covid-19 pandemic. Its longtime marketing focus on slender supermodels left its once-dominant position atop the lingerie market vulnerable to competitors who embrace more diverse body types. Its large store footprint is also increasingly outmoded as online shopping continues to gain a larger slice of consumer spending.
“There are tenants out there right now whose lease obligations are suffocating their business,” said Matthew Seigel, the principal of the retail advisory and brokerage company Lantern, who predicted that more tenants will sue to try to break from leases in the aftermath of the virus crisis. “We are starting to see litigation used as a tactic deployed to force a conversation with the goal of either restructuring or outright termination.”
Seigel said he could not comment specifically on the Victoria’s Secret space in Herald Square and was not familiar with the specifics of the situation.
The court action, and others like it, hinges on a legal argument known as “frustration of purpose,” which asserts that an unforeseeable event upending the economics of a deal can be used to void the agreement. It remains to be seen how state and federal courts will interpret and rule on that premise in cases where commercial tenants seek to use it to sever multi-million dollar lease commitments.
“Each lease has its own definition of the scenarios that might qualify as an unanticipated adverse change to the economics underpinning the lease,” said Matthew Parrott, who co-heads Fried Frank’s real estate litigation practice. “If that language isn’t specifically applicable to the current crisis, it’s going to be really hard to prevail in making these kinds of arguments.”
Victoria’s Secret has previously grappled with the lease at 2 Herald Square, launching a lawsuit in 2018 to dispute the space’s $10 million rent by challenging the appraisal that was done to calculate it.