Rosenberg & Estis, P.C. Secures Favorable Decision For Property Owner in Retail Space Dispute

logoReduces Rent Credit Payment by $2.5 Million; Plaintiff to Pay Attorneys' Fees

URBN Retail Group's Rent Credit Provision Found Unenforceable

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Rosenberg & Estis, P.C. has secured a highly favorable decision on behalf of a Manhattan property owner in a dispute with a national retailer over rent credits and late delivery of space. Rosenberg & Estis's efforts reduced the rent credit payment from $3.2 million to $650,000.

Free People, a member of the URBN family of brands (Urban Outfitters, Anthropologie, etc.) was plaintiff in the case, which went to trial in Supreme Court of New York State, New York County, before Justice Barry R. Ostrager. Rosenberg & Estis represented defendant Delshah 60 Ninth, LLC, owner of the retail space at 58-60 Ninth Avenue in Manhattan.

Rosenberg & Estis's Bradley S. Silverbush, member, with Richard B. Corde and Nithin Jayadeva, associates, represented the defendant. William F. Savino, partner, and Robert C. Carbone, associate, of Woods Oviatt Gilman acted as co-counsel. Drinker, Biddle & Reath LLP represented the plaintiff.

The case focused on rent credits prompted by late delivery of the retail space by the property owner. The rent credits graduated over time from one day of free rent to two and three days of free rent for each day of late delivery. Based on the formula in this provision, the plaintiff claimed that it was entitled to 825 days of free rent, or nearly $3.2 million. Plaintiff also maintained that the delay caused it to miss the holiday retail season, undermining online sales and damaging its reputation and stock price.

Rosenberg & Estis made a compromise offer of $1.5 million, which was rejected by the plaintiff. Under the law, if the plaintiff rejects a compromise offer to settle a dispute, and if the ultimate judgment is lower than the compromise offer, plaintiff must pay defendant's attorneys' fees incurred subsequent to the offer.

Rosenberg & Estis contended that the plaintiff was responsible for a portion of the delay and that the rent credit provision was grossly disproportionate to actual damages and therefore unenforceable. At trial, Silverbush characterized the penalty as unconscionable and obscene, paraphrasing United States Supreme Court Justice Potter Stewart's comments during a landmark 1964 obscenity case by saying: "While the law doesn't define grossly disproportionate, I know it when I see it."

The court found that the damages actually suffered by the plaintiff were far less than the damages called for in free-rent provision, and that the provision was an unenforceable penalty rather than a liquidated damages provision and alternate means to incentivize timely delivery of the space.

Justice Ostrager cited significant underperformance in sales in two other Free People stores in Manhattan during the period in question, in line with a broader decline in retail sales in New York City outlets.

Justice Ostrager said: "Free People overestimated the potential profitability of the 9th Avenue location and it would be unjust to enforce a penalty on the defendant that would be grossly disproportionate to any financial harm plaintiff actually suffered from delay in delivering the store...."