A J.Crew store closed during the Coronavirus pandemic in Washington, D.C., on June 6, 2020. Photo: Diego M. Radzinschi/ALM

This article appeared in New York Real Estate Law Reporter, a monthly newsletter featuring editorial commentary on significant real estate issues in New York and cases decided in the New York courts.

Malls across America, long suffering even before the rise of COVID-19, are now forced to confront a wave of store closures that will inevitably result from current economic and social factors (including social distancing). Troubled retailers will, without doubt, seek to close their failing mall locations. To stem these efforts, landlords have applied to courts for injunctive relief to force stores to remain open and operating, despite lagging sales, through the enforcement of the "continuous operations provision" found in mall leases.

Recently, on May 1, 2020, a New York appellate court issued a decision in Eastview Mall LLC v. Grace Holmes d/b/a J.Crew and J.Crew Group in which it vacated a preliminary injunction designed to force J.Crew, a retailer in a Victor, New York, mall, to remain open under the terms of this provision, in part due to the existence of a liquidated damages provision contained in the parties' lease. In vacating the preliminary injunction, which reversed the July 2018 ruling of a lower court that preliminarily enjoined J.Crew from closing, J.Crew was freed from a restraint on its ability to shutter the store.

In originally granting the preliminary injunction, the lower court was not persuaded that the liquidated damages provision could make the mall whole because, among other things, J.Crew's store was very important to the mall's success and closure would unfairly prejudice the mall. This fact, it found, rendered it more inequitable to the landlord if J.Crew closed than forcing the store to remain open would be to J.Crew. J.Crew's store, which was only 6,000 square feet in a mall of a million square feet, had argued that Gross Sales fell below the kick-out threshold, entitling it to exercise its contractual early termination right.

J.Crew appealed the decision. J.Crew argued, among other things that the presence of a liquidated damages clause in its lease and a weighing of the equities inherent in forcing a failing store to remain open, warranted a reversal.

In an important decision for retail mall tenants, the appellate court agreed with J.Crew and vacated the preliminary injunction. The majority of the appellate panel held that the landlord failed to establish irreparable injury and that upon a weighing of the equities, the harm to J.Crew, as the tenant, outweighed the harm to the landlord.

The Fourth Department zeroed in on the liquidated damages provision in the lease. This provision allowed the landlord to recover 150% of J.Crew's minimum rent in the event that it closed its store early, in breach of the lease. The parties agreed to the liquidated damages provision to make the landlord whole in the event of the loss of goodwill that could result from early closure. The clause articulated its purpose as one to compensate the landlord for "loss of value in the property because of bad publicity or appearance by Tenant's actions" (i.e., harm to goodwill and reputation), including "if Tenant shall … vacate the Demised Premises or cease operating its business therein."

The Fourth Department held that "the lease contains a liquidated damages provision that entitles plaintiff to certain money damages if defendants prematurely vacate the premises and cease operations … [and] because the lease specifically provides that plaintiff is entitled to certain money damages in the event that defendants vacate the premises in breach of the agreement—the very injury that serves as the predicate for plaintiff's action—we conclude that plaintiff has an adequate remedy at law and, moreover, that plaintiff has not suffered irreparable harm because the liquidated damages clause was intended as the sole remedy for such a breach."

The appellate panel drew another very important conclusion, namely, the court found "that the balance of the equities tips in favor of defendants." It held: "[h]ere, we conclude that the harm defendants will suffer if forced to keep their 6,000-square-foot store open against their will is greater than the injury plaintiff will suffer from the loss of one tenant in the mall, especially because plaintiff may still recoup its loss via the liquidated damages provision." Critically, the Fourth Department rejected the landlord's argument that it would be irreparably harmed by the loss of good will if J.Crew, a store it claimed was integral to the success of its mall, closed.

The Fourth Department's focus on the absence of irreparable harm as a result of the liquidated damages provision and the balancing of the equities in J.Crew's favor are important developments in the often sparse arsenal of defenses retailers can use to address landlord lawsuits designed to force retailers to remain open despite the economic consequences of doing so. This type of lawsuit is one that we may see with increasing frequency in the coming months. The pivotal holdings on liquidated damages and the tipping of the equities from the J.Crew case can be valuable arguments in attempting to defeat the effect of continuous operation provisions that are so frequently found in mall leases.

Naturally, each lease must be evaluated on its actual terms and each case turns on its specific facts and circumstances. However, this case allows for retailers to consider additional arguments when evaluating the litigation risk and economic consequences of closing a store where the lease contains a continuous operations provision.

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Danielle C. Lesser is the chair of the business litigation department of Morrison Cohen, and argued the appeal in Eastview Mall LLC v. Grace Holmes d/b/a J.Crew and J.Crew Group, Supreme Court, Appellate Division, Fourth Department, Index No. 118728-2018, and co-wrote the brief with Edward P. Gilbert.