ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Friday, October 17, 2008

Rapid Expansion Leads to Venti Triple Lease Breach

Having outgrown itself, Starbucks is in a slump. Back in July, it announced its first list of store closings - taking with it the life of our short-lived outfit in Central Islip, NY. And with the store closings, the WSJ reports that landlords are experiencing more than caffeine withdrawal (subscription required). The article reports:

A handful of property owners and developers have filed lawsuits alleging that the Seattle coffee giant owes them money for rent or other expenses on properties where the company has shut down a store or decided not to open one after entering a lease. At least seven lawsuits have been filed against Starbucks since last year, but the anger isn't limited just to litigants.

Starbucks, which is facing slow sales and weak earnings growth as customers cut back on lattes and Frappuccinos, intends to shut down more than 600 U.S. locations by early next year as part of a broader plan to revive the company.

The lease battles represent a turnabout for Starbucks, which has been one of the most sought-after retail tenants of the past decade. The chain helped draw other retailers to shopping centers and spent top dollar to get the best real estate during its rapid U.S. expansion.

Some landlords contend Starbucks is paying rent late or darkening stores before specifying the closure dates to make the landlords wary of a fight and to pressure them into letting the company out of leases for a price they deem too low.

Starbucks says that, in general, it is in compliance with its lease obligations and not aware of locations where it is behind on rent. The company isn't necessarily obligated to pay rent for sites it no longer plans to open. In court responses, Starbucks has denied many of the allegations in the lawsuits. In some cases, Starbucks has contended that the landlord didn't uphold its responsibility or that the lease gives the company the right to terminate it.

Starbucks' senior VP of U.S. store development explained: "We're not doing anything out of the norm of any other company that would seek to restructure its real-estate portfolio[.] Our No. 1 objective is to maximize shareholder value."

Apparently the lease language allows Starbucks to negotiate out of the leases but "landlords in general and liquidation professionals, based on their background knowledge, say there is no clear-cut way for the company to exit from all these leases."

Starbucks stated in July that it planned to spend $120 million to $140 million through early next year on lease terminations.

The summary from the McCain/Palin camp: in this economy, my friends, there is goin' to be a whole bunch of contract breachin'.

And the summary from the Obama/Biden camp: in this economy, some belt-tightening is going to be necessary, including your regular half-caf triple venti machiatto.

I wonder whether the Starbucks inside the restroom of the existing Starbucks is in arrears.

[Meredith R. Miller]

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