Legal Issues and Brightpoint and Shopping Centers and Simon Property Group and Lawsuits and Steak n Shake and Kite Realty Group and Retail and Real Estate & Retail

Retailers gain upper hand in negotiations with landlords

July 24, 2010

Retail tenants are getting as tightfisted with their cash as the recession-battered shoppers visiting theirstores.

Analysts say the slumping economy has altered the balance of power between shopping center landlords and their tenants, stripping landlords of the ability to extract big increases in rent when leases come up for renewal.

In some cases, in fact, retail chains are turning the tables and seeking reductions. They realize that landlords, already facing rising vacancies, are sometimes willing to sacrifice financially to keep properties filled and vibrant.

Nashville, Tenn.-based Genesco Inc., which owns locally based Hat World and other chains, boasted on a late May conference call that it had recently negotiated new deals on 100 locations that cut rent an average of 9 percent.

Even Indianapolis-based mall owner Simon Property Group Inc., which for years has used its vast national presence to its advantage in negotiations, has seen the spread between new and existing leases narrow.

“It’s still a very, very tough business,” CEO David Simon said last month at an investor conference in Chicago. “And demand from tenants is better, but it’s not like it was. Obviously, the rent dynamics with lower sales are tougher for landlords.”

Landlords are most vulnerable when leases that by today’s standards are above-market come up for negotiation.

Locally based shopping center owner Kite Realty Group Trust occasionally sees expirations for small-shop tenants paying per-square-foot rent in the high $20s or low $30s—far above the nearly $21 average for small shops companywide.

“But it’s not enough against the entire portfolio that we’re worried significantly,” CEO John Kite said in a conference call with analysts in May.

He downplayed the potential risk of falling rents. He noted that the average rent for big-box tenants already is less than $10 per square foot.

“So we are operating in an area that we think we don’t have a lot to give up,” he said.

Brightpoint, former exec brawl

Brightpoint Inc. and a former senior executive who also served on its board are brawling in court on two continents.

The Indianapolis-based wireless phone distributor charges that Steen Pedersen violated agreements to protect confidential information and not to compete with the company while he worked there or for two years afterward.

Pedersen, on the other hand, argues Brightpoint failed to pay him thousands of dollars due under a settlement and severance agreement he signed in connection with his July 2008 resignation as president of European operations.

Pedersen joined Brightpoint in 2007 in conjunction with the company’s purchase of Denmark-based Dangaard Telecom. He had been a founder and the CEO of Dangaard, which Brightpoint scooped up for $385 million in stock and the assumption of $350 million in debt.

Brightpoint charges in a Marion County lawsuit that Pedersen isn’t due severance because of his “disloyalty.” The company charged that, while he was working for Brightpoint, he “affiliated himself” with two companies within Denmark’s Fleggard Group that competed with Brightpoint.

Worse, Brightpoint says, Pedersen helped one use the trademarked “Dangaard” name, creating confusion in the marketplace, while the other bought phones from his Brightpoint unit at an overall loss to Brightpoint.

“Ultimately, Pedersen’s superior (albeit substantially undisclosed) loyalty to the Fleggard Group triumphed, and he resigned from Brightpoint,” the Indianapolis company said in its suit.

Pedersen “certainly denies” the allegations in Brightpoint’s suit, said one of his attorneys, Krieg DeVault partner Scott Morrison.

Pedersen started the legal battle in Denmark in March 2009. Brightpoint filed its case here a month later. A judge dismissed the local case in November, in part because of the similarity of the issues in the Danish case. The Indiana Court of Appeals in June upheld the ruling.

It’s not clear whether Brightpoint intends to ask the Indiana Supreme Court to review the decision. An attorney for the company could not be reached for comment.

Biglari buying Red Robin shares

Biglari Holdings Inc., parent of Steak n Shake, has amassed a 6-percent stake worth more than $19 million in one of its rivals, Red Robin Gourmet Burgers.

The stake, disclosed in a regulatory filing this month, has touched off speculation that CEO Sardar Biglari will make a run at buying the Connecticut-based firm.

Biglari took over Indianapolis-based Steak n Shake Co. in a 2007 proxy fight, helped return its restaurants to profitability, then transformed it into a holding company for a diverse range of investments.•

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