Landlords taking retailers to court over rent, other disputes

Landlords taking retailers to court over rent, other disputes
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First Published: Mon, Feb 09 2009. 10 10 PM IST

Deluge cases: A file photo of a Subhiksha store in New Delhi. The retailer, which is closing its stores all over the country, is facing several cases from landlords even as it talks to lenders to rest
Deluge cases: A file photo of a Subhiksha store in New Delhi. The retailer, which is closing its stores all over the country, is facing several cases from landlords even as it talks to lenders to rest
New Delhi: Three years ago, Arun Kapoor was thrilled whenSubhiksha Trading Services Ltd, then one of the fastest emerging modern retail chains in India, took his 1,350 sq. ft Kailash Colony shop in South Delhi on rent.
Today, Kapoor is one of several landlords who have taken the discount retailer to court to recover rent allegedly not paid for months together. Kapoor says he moved the Delhi high court late last year to recover from Subhiksha about Rs6 lakh owed towards five months’ rent. R. Subramanian, managing director of Subhiksha, has admitted to problems in making payments to vendors, landlords and staff.
Deluge cases: A file photo of a Subhiksha store in New Delhi. The retailer, which is closing its stores all over the country, is facing several cases from landlords even as it talks to lenders to restructure its debt. Harikrishna Katragadda / Mint
As the economy grows at a slower pace and credit becomes less easily available, retailers are struggling to raise cash to keep their operations running. Meanwhile, litigation is piling up in the courts as retailers shut outlets or refuse to move into space they leased earlier.
Over the months, landlords have filed dozens of cases against Subhiksha, Vishal Retail Ltd, Trent Ltd and Carrefour SA, among others, according to the Delhi high court website and lawyers. That’s a reversal of the situation before the downturn when it was the retailers suing the landlords.
Lawyer Narveer Dabas says he knows about 40 such “disputes”, many of which could end up in the courts. Law firm Jagmohan Singh and Associates says it has filed 15 such cases against retailers including Subhiksha, Pantaloon Retail (India) Ltd and the local unit of fashion house Benetton Group SpA.
Delhi-based real estate firm S.S. Enterprises has filed a case in the Delhi high court seeking rent due from Vishal Retail for 3,000 sq. ft of space leased to the retailer in Sahibabad, a suburb of New Delhi.
“Seven, eight months ago they stopped paying rent,” says Sudhir Naagar, lawyer for S.S. Enterprises, adding that Vishal Retail vacated the space before the 15-month lease period ended. “They say they are facing financial constraints…they say the slowdown has affected them.”
Manmohan Agarwal, head of corporate affairs at Vishal Retail, said the retailer had given a formal notice before vacating the premises, but the landlord had “illegally held up” furniture and other office equipment.
Carrefour was due to take possession of about 100,000 sq. ft of space in Anant Raj Group’s mall in central Delhi late last year, but the French retailer let the deadline lapse, said Amit Sarin, executive director at the mall developer. Both Anant Raj and Carrefour, which is yet to find an Indian partner, said the case has since been resolved.
ADK Real Estate has filed a case against Tata group-owned Trent for non-payment of a year’s rent for space it leased in a mall in north-west Delhi, according to ADK’s lawyer Dinesh Agnani. Trent declined to comment.
Before the economic downturn arrived last year, store chains snapped up space whereever it was available—residential neighbourhoods, city high streets, shopping malls—at whatever the price, anticipating a boom in the organized retail.
Rentals more than doubled in two years, rising from theday a mall was planned to the time it was built, as developers squeezed retailers for more money.
In late 2007, Pantaloon Retail (India) Ltd, the country’s largest listed retailer, took the biggest developer, DLF Ltd, to court over one such dispute. In 2004, Pantaloon had signed a memorandum of understanding to take on rent 110,000 sq. ft of space in DLF’s South Point Mall in Gurgaon at a rate of Rs39 per sq. ft for a period of nine years and the retailer handed over a cheque of Rs1 lakh as “token money”.
By the time the mall was nearing completion, rentals in the region had topped Rs300 per sq. ft. Pantaloon, which was to be the so-called anchor tenant in the mall, accused DLF of “backing out (of the agreement) because of boom in real estate sector and increase in property prices,” according to court documents.
In another instance, Piramyd Retail Ltd (that was later acquired by Indiabulls Group) dragged Ambience Developers Ltd to the Delhi high court over a similar dispute involving space in a Gurgaon mall.
The tables turned with the economy’s hot streak ending last year, forcing store chains including Pantaloon Retail, Reliance Retail Ltd, Aditya Birla Retail and Spencer’s Retail to start shutting outlets, prune store-sizes and hold back expansion plans.
“Many of the retailers are in problem as they are not able to see profit at those rentals and especially after the downturn that has happened over the past 10-12 months,” said C.B. Navalkar, chief financial officer of Shoppers’ Stop Ltd, the country’s largest department store operator.
Retailers have been moving out of space they leased, arguing that they can’t afford to pay the high rentals they agreed to in the boom years, Navalkar said. They are also trying to move to cheaper locations after rentals fell in recent months, lawyers said.
It then became the turn of the landlords to sue the retailers. The landlords say they are losing money because retailers are either not moving into space they had leased or are shutting shop and moving out without paying the rent.
Chennai-based Subhiksha, which is closing down stores all over the country, is facing several cases from landlords even as it pursues talks with lenders to restructure its debt. The debt-restructuring process will take 30-40 days, founder Subramaniam told Bloomberg on Monday.
Subhiksha’s stores have been vandalized in almost all northern states and parts of Maharashtra, he said, because the outlets had been left unguarded by employees and security agencies who hadn’t been paid.
Star City Mall in New Delhi’s Mayur Vihar neighbourhood is facing a flight of retailers. Reliance Retail’s footwear format is shutting shop at the mall, joining a host of retailers including Levi Strauss Ltd, garment retailer Koutons Retail and electronics chain Next, among others, according to staff at various stores.
Pushkar Mahatta, director of Mahatta Towers Pvt. Ltd that owns Star City, says retailers are leaving as their sales are unable to justify the rents they pay. “I don’t think they have the rental capacity nowadays,” Mahatta says. “It’s (like that) all over India.”
According to Rajneesh Mahajan, executive director of retail services for real estate consultancy Cushman and Wakefield, real estate rentals have dropped nationwide anywhere between 20% and 40% in the last one year.
“People said: ‘Okay, I am blocking a space today and I am paying a premium and in the next two-three years business will become viable and profitable’. So they were willing to take that hit initailly,” Mahajan said. But that didn’t happen and as growth slowed, their business became unviable and difficult to sustain.
A lawyer, who declined to be identified, said he is representing three small retailers who have leased stores in shopping malls. The clients want to shut down and move because they are losing money, but are hesitating because their agreement stipulates a lock-in period that is yet to expire.
Dabas, the lawyer representing several landlords, says his clients suffer from not only retailers not taking up space but also because they cannot offer it on rent to anyone else unless the tenant issues a so-called no-objection letter (NOC).
The landlords “cannot let them (out) to others unless they get NOC from the existing retailer,” Dabas said.
Shubhranshu Pani, managing director for retail services at real estate consultancy Jones Lang LaSalle Meghraj, expects rentals to fall further by 5-10% in the next two to three months.
“There are macro economic reasons, but the bottom line for retailer properties is that many of them are trading at higher prices and retailers are not making money at those prices,” Pani said. “Now...retailers are realizing that when you don’t have money there is no point in making more mistakes and are moving into cheaper locations.”
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First Published: Mon, Feb 09 2009. 10 10 PM IST