Gap Sues Westfield Over Mall Expenses as Tensions Rise in Retail World
18 July 2018 - 12:37AM
Dow Jones News
By Mike Cherney
Gap Inc. is suing high-end-mall operator Westfield for allegedly
overcharging the fashion retailer in an action that underscores the
sometimes-tense relationship between landlords and tenants as
e-commerce transforms the retail sector.
Other well-known U.S. retailers, such as Starbucks and Saks
Fifth Avenue, have duked it out with landlords in court recently as
they've sought to trim costs amidst a glut of shopping-center
space. Mall vacancies in the U.S. recently hit a six-year high,
with strip malls and neighborhood centers particularly
hard-hit.
Gap's lawsuit, filed in May in a state court in Los Angeles,
charges Westfield with using fraudulent accounting that resulted in
Gap paying more than its fair share of mall expenses at more than
two dozen shopping centers. Gap also sued Westfield's contractors
that provided trash collection, including Waste Management Inc.,
for charging non-competitive rates that were too high.
The lawsuit was filed about a month before European mall
operator Unibail-Rodamco closed its acquisition of Australia-based
Westfield. A spokesman for the merged company, now named
Unibail-Rodamco-Westfield, declined comment, saying that it doesn't
discuss pending litigation.
"We take potential allegations very seriously," a Waste
Management spokeswoman said, though she declined to elaborate
because the matter is ongoing.
The defendants have yet to file a legal response to the case,
according to the court docket. Gap, which also owns Banana
Republic, Old Navy and Athleta, declined comment beyond what's
alleged in the lawsuit.
Mall leases typically allow landlords to charge tenants for
their proportionate share of certain expenses, such as taxes and
maintenance fees. Disputes over these expenses are common, but
landlords and tenants are often able to settle their disagreements
without resorting to a lawsuit, lawyers said.
Now, however, the tough retail environment is creating "fertile
territory for there to be more challenges," said Douglas M.
Bregman, a commercial-real-estate lawyer and senior partner at
Bregman Berbert Schwartz & Gilday LLC in Bethesda, Md. "Larger
tenants are not thrilled at paying anything that they don't have to
pay."
Gap's legal papers say that its proportion of mall expenses was
calculated based on the so-called "gross leasable area" of a
development. The smaller the area, the more that Gap would have to
pay as its share. But Gap says Westfield improperly excluded
certain areas of its malls when making the calculation, which
increased Gap's bill.
Gap says department stores, and stores with a "primary exterior
entrance, " could be excluded from the calculation. However, it
argues that vacant department stores can't be excluded -- and that
Westfield counted vacant stores as operating stores. It also argues
Westfield improperly counted movie theaters as department stores,
and that Westfield said some stores had a primary exterior entrance
when in fact they did not.
Westfield "prevented plaintiffs from discovering the fact and
extent of Westfield's overcharges and other misconduct," Gap said
in the lawsuit. For years, it said, Westfield "prolonged this delay
by providing incomplete information while purporting to negotiate a
settlement concerning the overcharges."
According to the lawsuit, Westfield acknowledged and agreed to
pay some of the alleged overcharges, and, in one instance, said it
would pay Gap more than $1.8 million. But Gap says Westfield has
withheld any payment until a "global resolution" is reached.
Some lawyers said the allegations involving the trash collection
were unusual.
Once tenants feel they've been wronged in one way, they start to
be "suspect in some other areas," said Nina Roket,
co-administrative partner and leader of the leasing practice at New
York-based Olshan Frome Wolosky LLP.
Westfield operates marquee malls in the U.S., including the new
Westfield World Trade Center in New York and Westfield Century City
in Los Angeles. In recent years it sold off smaller,
underperforming malls to focus on its higher-end properties, which
have held up better in the online era by offering more amenities to
keep shoppers interested.
Bruce May, chair of the real-estate department at Jennings
Strouss & Salmon PLC in Phoenix, called Gap's lawsuit a
"textbook case" that highlights the difficulty in determining how
much tenants should pay for mall maintenance fees. He predicted
Westfield would settle the case before it goes to trial.
"It raises issues that you may not think of when you're drafting
a lease, " he said.
Write to Mike Cherney at Mike.Cherney@wsj.com
(END) Dow Jones Newswires
July 17, 2018 10:22 ET (14:22 GMT)
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