Apparel retailer liable for $13 million for four and a half years of rent remaining on lease, plus attorneys’ fees
NEW YORK, NY, August 30, 2022 – Rosenberg & Estis P.C. and a pair of Buffalo law firms have secured summary judgment in the U.S. District Court for the Southern District of New York against Urban Outfitters’ subsidiary Free People for a rent default at 58-60 Ninth Avenue in Manhattan’s Meatpacking District. The decision leaves Free People, a member of the URBN family of brands, liable for $13 million in rent.
The case involved the Free People’s tenancy in a 6,800-square-foot ground-floor space at 58-60 Ninth Avenue, a building owned by a subsidiary of Delshah Capital. Final damages are set to be decided during a September inquest hearing.
The ruling marks the third favorable rent-related decision obtained by Rosenberg & Estis and the two Buffalo firms on behalf of Delshah in cases against Free People since 2017. Bradley S. Silverbush, Member of Rosenberg & Estis, represented the plaintiff.
Woods Oviatt Gilman LLP attorneys William Savino, Partner, and Bernard Schenkler, Of Counsel, and Robert Carbone, Partner at Duke Holzman Photiadis & Gresens, LLP acted as co-counsel with Rosenberg & Estis on the Delshah case. Free People was represented by Faegre Drinker Biddle & Reath LLP, a 1,200-employee firm with offices nationwide.
The action was removed from New York State Supreme Court to U.S. District Court by a Notice of Removal filed by the defendant’s attorneys. Rosenberg & Estis and Delshah made a strategic decision not to oppose removal because the Southern District offered the potential for a swifter and more favorable decision.
After removal and discovery, Rosenberg & Estis sought summary judgment. The primary issues raised by Rosenberg & Estis were: (1) whether Free People breached the lease by failing to pay April and May 2020 rent; and (2) whether the “taking” clause of the lease provided a defense to non-payment of 100% of the rent during the months since the Governor’s pandemic-related Executive Orders temporarily restricted in-person retail sales.
After due consideration, U.S. Magistrate Judge Sarah L. Cave recommended granting Rosenberg & Estis’ motion for summary judgment, adjudging that Free People beached the terms of its 10-year lease by failing to make payments of rent for April and May of 2020. Specifically, the judge recommended rejecting Free People’s “taking,” frustration and impossibility affirmative defenses.
In addition, she recommended rejecting Free People’s unjust enrichment cause of action (for allegedly mistaken rent payments because those payments were governed by the contract between the parties); and she recommended rejecting Free People’s counterclaim asserting that Delshah breached the contract.
After objections by Faegre Drinker were filed, and due consideration of both sides’ arguments, Federal Judge Jesse M. Furman wholly adopted the guidance provided by Magistrate Judge Cave’s Report and Recommendation.
Furman granted summary judgment to Delshah, upholding the plaintiff’s breach-of-contract claim, while dismissing Free People’s breach-of-lease and unjust enrichment claims. Furman also dismissed Free People’s remaining affirmative defenses and counterclaims due to the defendant’s faulty doctrinal application of the offset, failure of consideration, illegality, and unconscionability/mistake arguments. The judge ordered an inquest on Delshah’s claim for damages.
“Free People claimed to have surrendered possession of the premises, but it continued to hold storage in the space and publicly stated that the storefront benefited its online sales,” Silverbush said. “The tenant seemingly believed it would receive more sympathy in federal court, wrongly anticipating that the court would disregard the facts of the case.”
Delshah initially sued Free People in June 2020 in state Supreme Court shortly after serving a default notice when Free People failed to make rent payments in April and May of 2020. The remainder of Free People’s 10-year lease, worth $1.4 million annually, was due to expire in January 2027.
Delshah’s suit sought back rent plus “all rent that would have been due for the remainder of the lease term,” or nearly $11 million. Furman’s decision holds Free People responsible for the lease’s roughly four and a half years of remaining rent and a portion of Delshah’s legal fees.
Free People unsuccessfully claimed it had no obligation to pay rent between March and June of 2020 because the premises were subject to a “taking,” as per the lease’s terms, due to the store’s supposed inability to use the space during the pandemic. R&E showed Free People continued to use the store for offices, storage and to fulfill online orders with curbside pickups, which helped the retailer with sales because of its physical presence.
Rosenberg & Estis has secured two previous favorable decisions against Free People
Rosenberg & Estis has secured two previous favorable decisions against Free People, with all of the aforementioned Buffalo attorneys also acting as co-counsel.
R&E secured its first favorable decision for Delshah against Free People in October 2017 in a state Supreme Court in New York County case involving rent credits and the late delivery of space. Free People, the plaintiff in that case, had claimed it was entitled to 825 days of free rent after Delshah delivered the store’s former Ninth Avenue space more than a year late.
Free People sought nearly $3.2 million in rent credits, asserting the delay caused the store to miss the 2015 holiday retail season and damaged its reputation and its stock price. Delshah successfully countered that Free People also contributed to the move-in delay, and that the store had radically overestimated how much it would earn in the location.
State Supreme Court Justice Barry R. Ostrager held it unjust to enforce a rent credits penalty that would have been grossly disproportionate to any financial harm Free People suffered from Delshah’s delay. The judge reduced Delshah’s rent credit payments by $2.5 million and ordered Free People to pay attorneys’ fees.
Rosenberg & Estis later secured its second favorable decision for Delshah against Free people, when a five-member panel of the Appellate Term, Second Department of New York State Supreme Court subsequently upheld the state Supreme Court’s decision, rendering Free People’s lease penalty provision unenforceable.