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2020 was already expected to be a challenging year for the retail industry and the worldwide pandemic only intensified the underlying troubles. Heading into the year, one estimate projected that 12,000 major chain stores would close in 2020. Today, a number of high-profile brands are in bankruptcy and tenants and landlords alike are struggling to recover from COVID-19 related closures. On this episode, Waller's Steve Kirkham and Mark Taylor are joined by Tracy Pelham, counsel at Genesco, to discuss the retail industry's woes and what options exist for retailers, landlords and lenders moving forward.

 

 

The following is a transcript of the conversation:

Morgan Ribeiro

Welcome to PointByPoint. This is Morgan Ribeiro, the chief business development officer at Waller and the host of the podcast. Today, we are talking about what many have coined the retail apocalypse, which is the closing of numerous brick and mortar retail stores, including many large chains worldwide.

The shift began about 10 years ago but has been accelerated by the COVID-19 pandemic and the resulting shutdowns. Cushman and Wakefield estimated last year - prior to the coronavirus pandemic - that as many as 12,000 major chain stores could close in 2020. Bankruptcies and store closings are expected to intensify as a result of the pandemic and retailers who were already struggling were forced to close temporarily.

And then those that have since reopened, continue to experience dramatic drops in traffic. So think of J. Crew, Neiman Marcus, J.C. Penney, and these are all among retailers who have filed for bankruptcy since the start of the pandemic and others who have filed such as Stein Mart and Lord & Taylor are now in full liquidation.

Here to discuss options that struggling retailers might explore are Mark Taylor, a partner and Waller's finance and restructuring group, Steve Kirkham, a partner in our real estate practice group and the co-leader of the firm's retail and hospitality team, and Tracy Pelham, who is counsel at Genesco,  which is the parent company to brands like Journeys and Johnston & Murphy and others that our listeners are likely familiar with. So thank you everyone for joining me today.

Back in October, Forbes had reported that more than 14,000 stores have closed this year alone. So Mark, for others who may be listening today and are concerned about their future, what are ways that they can successfully restructure their business? What considerations should they make to prevent a bankruptcy?

Mark Taylor

I think they would approach it the same way you approach any type of workout. First of all, approach your landlord or your banker or your creditors early. I go to them and let them know that you're having issues so you can start working with them. What landlords and bankers don't like are surprises. And so if you let them know upfront that you're having issues, then that's very helpful. The second thing you want to do is be upfront about what your issues are. You want to lay your cards on the table, tell them what the problems are and also show what your plan is to move forward. That doesn't necessarily have to be a formal written plan, but at least have some ideas in cash flow, projections, and pro formas. If you can put those together to show how you think things are going to turn around and how you can make your business viable and keep it viable. I think you need to offer them something. and sometimes you don't have any cash. it makes it difficult to make payments. But if you can go to them and say, we can't make full payments on the debt, or we can't make full payments on the lease but we can do this and we can give you this amount and we'll defer the rest. That's very helpful.

And finally, you want to keep them updated constantly because again, surprises are not your friend in this situation. And so if you can go to them regularly and let them know where things stand, how you're turning around and how are you trying to get out of it, it's very helpful. In that regard, a couple of things you can do for help is: Go hire a financial advisor. And that doesn't mean it has to be somebody that's, one of the huge, expensive financial advisors. They're very helpful in certain situations. But there are lots of groups out there that have spun off of some of the bigger firms or started a smaller practice where you can go and they're more affordable to help you through this process and try to find someone that has experience in the retail space.

The other thing you can do is consult with a restructuring counsel who is experienced in dealing with the creditors and the landlords and the bankers to help you put this all together and help you through this process. They don't have to be confrontational. It doesn't mean you're starting to fight. It's just someone to help you, guide you through the process and work with their attorneys, if they have attorneys involved, to get you to the right result.

Morgan

Mark, I think it's interesting. I recorded some podcasts months ago around the real estate components to this and it just seems like having an open dialogue and not running from the problem, but I think having the conversation earlier on versus kind of a wait-and-see approach, can really go a long way in these situations. A question for you, Steve -  specifically with landlords, should a retailer consider restructuring or renegotiating with landlords, how does that work specifically?

Steven Kirkham

The answer is absolutely. And we've had a lot of success with that. The way it normally works is, there's typically not been a device under the lease that allows an automatic restructure, but it's having a conversation approaching the landlord, deciding what strategy you're going to use, what you're going to ask for.

Typically what we've seen has been either a request for abatement of some portion of the rent. There's been a lot of instances of deferral of rent, restructuring the rent, taking rent away from 2020, reapplying it to 2021. Sometimes that's done in percentages, and Tracy can talk to this more because she's done a ton of it as well, but the key to all of this is just approaching a landlord and emphasizing the issues that your business is having - at the same time, understanding the issues that the landlord's business is having - to try and match those up and then find a path forward that allows you some relief and some remedy for the short- term, even if that's a long-term trade-off, Yeah, and some of that has been not only negotiating on rent but also trading off some term, extending terms. We've also delved into some other key components of leases that we've traded back and forth. Sometimes some landlords wanted some additional restrictions. The book is pretty much open. It's a new negotiation. This is the key takeaway to this.

Tracy Pelham

To continue along those lines. I can just speak from what I've been doing, and what my company has been doing since this pandemic hit. We definitely tried to make a pre-emptive strike and contact our landlords immediately. We didn't just sit and wait to see what was going to happen or to start hearing from them. We approached them and said, 'Everybody knows what's going on. It's financial hardship all the way around. The only way that we're going to have some success with this is to be good partners.' And that's what we've always tried to do. We want to continue to do that. And we sent notices out to our entire portfolio, spelling all of that out and putting out there what we were seeking.

We made a request, we made an offer. That started the conversation and that started the back and forth. And we've been negotiating since March on our portfolio and have had a great amount of success. And we have had feedback from the landlords saying how much they appreciate that we approached it that way, that we didn't just run and hide. We didn't just stop everything. We came to them and we said, this is what we need to survive. And to make it through this, please work with us. And it's really done well for us, so I would encourage anybody. It's late in the game now, but it's definitely the way to go.

Steven

Yeah. I've seen both approaches of either the hard approach, which is different than what we're talking about, where tenants tried to run in and present parts of the lease and really try to slam the landlord with different provisions of the lease and say, we're not operating because we can't or we won't and generally that's not been as successful as the more open, 'Hey, look, we're in this together.' We've heard that too many times, but, taking that approach has been more fruitful from my observation. A lot of the landlords, particularly the larger landlords, they've heard this, you're not the only one and so they've put together their position on how they're gonna react and, you're having to push through and most of those guys took a hard position. They all have their own challenges- their lenders, expenses don't quit in a large facility that a lot of these things are in. So they've got those challenges themselves. And they're feeling the pressure. and so it's difficult to just run to them and say, 'We're here. The lease says, ‘you have to keep the lights on.' And, there's a push back there that you have to be prepared for, I think, and having an open dialogue is easier to get through that pushback than trying to present a notice letter or lawyer letter,  making several demands.

Morgan

Tracy, I'd be curious to know, just, we've talked a lot about the kind of landlord relationship with retail owners and of course the strain that everybody is under given the current conditions.  Are there other aspects of your role as counsel at a large retailer that have changed as a result of the pandemic?

Tracy

My role has definitely changed. P re-COVID, we were looking to really grow and enter into new leases and new deals. And we were popping. And so my role was negotiating those deals - new deals, amendments, extensions, things of that nature. Once the pandemic hit and we had to close our portfolio of stores, then it really became just hold what you've got and let's figure this out and having to deal with the blowback of shutting down operations and rents and landlords and just, everything that we've talked about. So it's really been more of a reaction to everything that has come in. Cause you know, retailers across the board -  we're not special in this - every retailer that I know not only closed their stores, whether it was because it was government-mandated or because they decided as a company that was for the health of their employees. and other reasons -  stopped paying rent because you're trying to just keep the ship afloat. And then the fun begins with the default notices and, threatens litigation and different things like that. So it really becomes just a reactionary position to the hundreds of notices that you're getting in a day or the lawsuits that may be coming in. Fortunately we've, not really had to deal with a whole lot of litigation because we have been trying to be good partners with our landlords. And like I said before, we reached out to them and we told them we need help. we understand your position, but understand ours, what can we do to get through this together? But that's really been my role for - what - eight months now? Eventually, I think I'll get back to what my job was that I was hired for but it's really been a learning process. It puts a lot of things into play because even going forward, you're always looking at opportunities to make your lease documents better and all of that sort of thing. But there are so many things that came out of this, because it's something that we've never seen before that you're really having to drill down into your leases. So it becomes not only a, 'Hey, we need abatement, deferral, but we need to look at 10 other provisions in our lease because it didn't cover it or it was clear as mud.' When all of this came about things like, if you've got a co-tenancy provision in your lease, generally, you're going to have language that says you can avail yourself of certain remedies. If you're not in default of the lease, if you're open and operating if there are some hurdles where other tenants are supposed to be open and operating, and those thresholds, now what does open and operating mean?

We never had to drill into those sorts of things before. At least I've not ever had to - is open and operating that you're using this store as a fulfillment center where the landlord's going to argue 'yes, that's open and are operating' well, that doesn't help my company because we thrive on foot traffic.

So if the mall itself isn't open, where people can come in and shop and do all those sorts of things - curbside delivery doesn't help my business. Fulfillment and online does not help my business. That's not going to keep my stores open. So there's a lot of different nuances to the leases that we're having to go back and reopen certain negotiations with some of these landlords,  just to get additional protections so that -  if there's another shutdown - we're not having to start from square one again. Have we had success? We've had pretty good success with the rent piece - a lot of landlords are just not willing right now to go the full gamut of renegotiating the entire lease because they also don't know what the future holds.

So they don't want to box themselves in a corner and start giving you all of these provisions and whatnot. When you know, it could also come back to haunt them. So it's a real tightrope that everybody's walking right now trying to figure this out.

Morgan

Tracy, kind of piggybacking along that, how has Genesco or other retailers that you're familiar with? How have you all been able to successfully pivot and whether or not that's the shift to omnichannel retail or moving into other lines? How have you all had to get creative in terms of what your business looks like?

Tracy

Yeah. There's a lot of discussions surrounding that. And I'll be honest with you, I'm not always on the front lines of those discussions. But I can tell you, as far as our online business was a very small piece of our overall revenue. That has significantly picked up, and I think it's probably very obvious why it would. people just don't want to go out and shop necessarily the way that they used to.

Steven

Morgan, in talking to some of our clients, they've said the ones who have come through it have said almost uniformly that they now feel like they know their business better and in a better and a different way.

And certain things that they had ignored before. Like we'd have a number of restaurant clients who have talked about that they now understand how to service customers who are far and have refined their to-go orders, which were growing part of the restaurant business anyway, but have figured out how to do that to a point where a number of them have gained new customers who don't go to sitdown restaurants anymore, particularly more of the fast-casual. We've got a couple of fast-casual clients who are - this is an opportunity for them to grow because regular sit-down restaurants are out of business and they've worked through, the glitches that they frankly said they had ignored before and some of their to-go service where they have almost returned a hundred percent pre-COVID but in a completely different kind of delivery system. There are silver linings to this that should be recognized. And they are there, it's not something that they would have chosen to do, but by the fact that they've had to go through this, they feel like they're better situated.

Even when our return to, after a vaccine or COVID goes away, they can continue those successes while returning to some of their more traditional operating methods. So businesses, adapt and find ways to overcome and do things better, and in the long run, if they can make it over the hump of what this is, will probably make them better operators and better understand their customer base long-term.

Morgan

Yeah, I agree. and it seems like some of this it's almost accelerating the trends that we saw over the past 10 years in this move to online. It's just that this has forced us to do this at a more rapid speed. And I think, Tracy, to your earlier point, weren't prepared to do this in 2020, but here we are.

And I think it is forcing us all to ask, regardless of industry, but particularly in retail,  some really hard questions about what the future looks like and how we approach things moving forward. Mark, I want to go back to you, real quick, I think on success stories and what you have observed in the retail space.

Mark

I can give you a couple though I can't give names, obviously. These were out of bankruptcy and are ongoing right now. One, we were actually on the lender side and the borrower came to us early and talked about the issues and laid out a plan. And we were able to work out a forbearance agreement that seems to be performing very well.

 On the other side, we were representing a hotel group, and again, we went to the lenders early,  and so far, they have been very understanding and been able to work with us and being about to avoid bankruptcy.  But even if you go into bankruptcy, it's not that you're going to liquidate necessarily.

Morgan, you talked about the fact that the number of liquidations going on right now, and that is certainly a possibility in bankruptcy, but you look at people at Neiman Marcus who slimmed down and came out and reduced their debt load.  J.C. Penney is going to continue to operate. And some of these other retail brands like Brooks Brothers,  or Lucky Brands, are continuing on.

And so you can be successful in a bankruptcy. Although I do a lot of bankruptcy work, it's a success if we keep it out of bankruptcy, whether I'm representing the retailer or the borrower or the lender or the landlord. And so that's what everyone really wants to have happen, and everyone wants to work towards that goal. But even if you have to go in, it doesn't mean they are not going to come out on the other side.

All of us have talked about going to your creditors and going your landlords and going to your lenders early on and working with them. And that's really important if you ultimately wound up filing bankruptcy, because when you go in if you go in as just the debtor or you have nobody on your side, I mentioned very difficult to reorganize. If you go and you have your lenders working with you, or at least comfortable with you, and you have your landlord working with you and you have your major creditors working with you, it makes it a faster process it makes it a cheaper process that greatly enhances the chances that you're going to reorganize.

Morgan

That's an excellent point. One thing I want to go back to that really came up early on in the pandemic and it seems like it was something that you all probably learned in law school and then never really thought much about, but,  is this whole concept of force majeure? Have retailers been able to successfully use force majeure clauses to delay rent payments?

Mark

So in bankruptcy, when you go in and you owe rent, you can get relief for 60 days from the date you file or go to the court and ask for the deferment period.

The problem is, at the end of the deferment period, you have to pay the sixty days worth of rent and keep paying it current during the bankruptcy. And you've seen in a couple of cases, retailers try to get an extension of that period effectively by arguing force majeure. The only places that I've seen that work so far are in the Chuck E. Cheese bankruptcy in Houston, where they've been able to push off a couple of the lease payment obligations or the force majeure clause under very specific provisions that allowed you to defer paying rent if there was a government order, they close down your business and that was the cause of your inability to pay rent. There was also a restaurant chain up in Illinois that was able to get the bankruptcy court to do the same thing. Interestingly, in both of those cases, the bankruptcy court didn't defer all the rent. It required them to pay a reduced rent based upon what they ought to be able to pay by doing curbside service.

And so that's what you're seeing. You're not seeing a broad stroke relief in bankruptcy court. But you're seeing some relief in specific circumstances, but it's based upon the particular wording and the force majeure clause, not something that's magic in the bankruptcy case.

Morgan

Steve or Tracy, anything you'd add to force majeure?

Steven

When the shutdown first occurred in April, we spent 60 days plying through. I would say hundreds of leases, reading force majeure clauses, and ultimately the guidance that we came back, as a group, was that absent some specific language that would be peculiar in a lease, which we really didn't find that often, then it was more of a case of 'frustration of purpose' was the better argument - to try to push back on rent payment. Most of the force majeure provisions, at best would allow an out as far as other provisions in the lease, like a continuous occupancy or continuous operations, or some other things along those lines, but almost always this was carved out on a well-crafted lease.

So the landlord is going to say, you pay rent regardless,  and force majeure doesn't apply to that. Now a whole lot of leases now that are getting drafted,  in the force majeure section  will add pandemic or something of that nature as a part of it and a lot of that's getting pushed back from landlords who say, if this happens again, you're going to pay the rent.

 If there's a tornado,  if there's an earthquake, those are maybe force majeure, but a pandemic - we're not going to agree to that. My experience was force majeure really did not work outside of some really strange language and unless that got put in there that just was not a winner.

Tracy

I agree with everything that Steve just said, general force majeure clauses are not going to give you any kind of abatement or relief from rent obligations. One thing I know that we have talked about, or that I have thought about when we get to this point of addressing force majeure clauses in leases is not only trying to add that category of pandemic but also see if we can get some landlords to possibly help share the pain a little bit by, to the extent we are having to shut down again, maybe it's not a complete, 'we don't have to pay rent,' but if there's somehow that we could maybe carve in a 'percentage rent' type theory of depending on what our revenue is, we'll give you a cut of that.

But if the revenue is zero, then your cut is zero. So that's some of the ways that we're thinking about trying to go back to landlords and get them to sign on. Now I've not started that process yet. That's going to be the next step. Once I can get through everything. As far as our portfolio right now, just trying to work through the times that we were closed and rent and all that fun stuff.

But that's another partnership with your landlord that you've got to try and figure out if you can come up with something, create something that spreads the risk, and it's not all just on one party.  That's the hardest pill to swallow is if you don't have any revenue coming in, how do you continue paying rent? You're not going to stay viable very long under those circumstances.

Steven

It's an interesting sort of thing because already the conversation and trying to draft those provisions and work them in is: 'What is a pandemic? Was this even really a pandemic?'

In the situations where there was government-imposed shutdowns, those were easy.

In some of those instances, we had some success in arguing force majeure. But, just as a general matter, if there's a suggested restriction in business or particularly on some of them were like restaurants now are at 50% occupancy, you're not required to be closed, you're not allowed to operate at the level you anticipated, but no one's telling you have to be closed and so it's hard to argue back, 'yeah, we can't operate, even 'frustration of purpose.' Doesn't really work in that case because you are allowed to open, you just can't operate the way you hoped you would be able to and landlords say, there's no guarantees in business. There's no guarantees in life. No one ever promised you'd have a full store day-in and day-out. How do you define those type of situations? And it also starts to beg the question of how much time has worked negotiating in a lease, something that is so hypothetical that may be a once-in-a-lifetime occurrence. and how do you get it?

Because truth is always stranger than fiction and what will be the next situation? Like this will probably be something slightly different enough that whatever we write won't exactly fit it the way we wish we could've written it knowing what we know now.

Morgan

In closing, I think you've all covered this to some extent, but I would love either some parting thoughts or lessons that can be learned through these recent experiences for our retail retailers that are listening.

Mark

Morgan,  earlier you mentioned Lord & Taylor. Now that's an example to me, of somebody where their business was not well-positioned. They had some brand identity for a long time. They weren't Neiman Marcus and they weren't Nordstrom and had trouble positioning themselves. And to me, what you look at some of these failures are, 'is this really a business problem? Are you missing a fundamental shift in your industry?' And, a couple of examples of that, going back in the past -Blockbuster was a perfect example of a company that did not realize that there was a massive shift in their industry. Kodak is another one. And I think today, what we have to look at is the movie industry and the studios are starting to push the product out on the streaming platforms. And five of the six major movie studios have their own streaming platforms,  either they own or they're affiliated companies own. And so it's going to be, I think, a change in that industry. And the movie theaters have to figure out how they can adapt to effectively compete with the studios that gave them no product in the past.

And that's something that I think here over the next few months is going to be a significant issue for these movie theaters and all of the creditors that deal with movie theaters.

Steven

There are certain things you learn from this because you hope that we never experience this again. I think Mark hit upon a really good point to the extent that there were weaknesses in businesses that were already there. This certainly brought those out in a way. Many businesses were trying to fight their way through a situation that looked like an uphill battle. And this just laid to bare in a way that they couldn't avoid it. Those were the businesses that I've seen that really are not surviving and probably won't survive.

Most of those probably would have had a problem surviving over three years anyway. This just accelerated all the problems. I don't know how you avoid that. That's general business. You try to avoid the pitfalls that are out there.

A situation like this just brings them to a place that really highlights the problems that you have. it's just knowing your business, trying to get ahead of problems and don't assume that you can outrun something that is it's obviously you're going to have to tackle.

Tracy

I know a lot of retailers are also trying to shift to more of a shared risk platform. Meaning that, instead of having this guaranteed minimum rent that is gonna just cause you to bleed when something like this happens, sharing that risk with the landlord to where you're trying to negotiate more of a percentage rent -type situation so that when you're doing really well, the landlord is going to do really well, but you're also going to share some of that risk of the loss. And if retailers across the board can be more successful in those sorts of negotiations, then you really don't have to worry so much with a lot of the other provisions that you have in your lease, because if it's a percentage basis - if you're having to close or if traffic slows down or things like that - then you know, you're not just bleeding this rent that you eventually can't afford to pay. If the traffic isn't there, if the revenue isn't there.

So that's been a lot of talk that I've seen in the retail industry of negotiating or renegotiating. Some of the lease agreements when you're going back to the landlords, I know we're pushing it pretty hard.

Steven

Tracy, so many of our leases set percentage ramp, but there's a natural break point there does that mean eliminating the natural break point and just going straight percentage rent then where we've already got percentage rent provisions built-in, but they're just above and beyond.

Tracy

That's where we start. And that's where a lot of the retailers that, like I said, that we have talked to that's where they start. You're not always going to be successful, but yeah, just a true percentage rent of whatever your gross sales are. And then, of course, you have to define what your gross sales look like, getting charges and fees and things like that out of that number that you're not paying percentage rent on that, but yeah, just a true percentage rent.

Steven

Yeah. In a way it's been, the landlord has gotten the upside of that for years because percentage rent above and beyond the break point, they're already getting that. They just had the benefit of the floor that the break point created. And so the elimination or lowering of the break point is more of the sharing the risk aspect.

Tracy

That's right.

Morgan

I think, throughout this conversation, it's that mutually beneficial relationship between the retailer and the landlord and creditors and it's figuring out a way to where everyone can win together. I have really enjoyed this conversation. I appreciate everyone's time today and all the considerations and look forward to further discussions.

 

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