When J. Crew Group filed for Chapter 11 protection this month, it asked for what was becoming a common request in retail bankruptcies during the coronavirus pandemic: to defer paying rent for 60 days, while stores were closed due to lockdowns and social distancing.
This week, a group of landlords for the company objected, arguing that many of the states where J. Crew operates stores are now allowing nonessential retailers to reopen.
The question of reopening stores, before testing and contact tracing efforts can be adequately scaled up, has prompted retail employees to raise flags about health risks. But only eight states, including New York, California and Michigan, are still in the shut down phase, the landlords argued in their filing, pointing to the partial and imminent reopenings elsewhere around the country.
“This represents a fundamental difference between the retail cases filed before the COVID-19 pandemic and the debtors’ situation,” the landlords said in their filing Monday in Virginia bankruptcy court.
“The pre-COVID-19 cases were forced to shut down operations with very little warning after they filed, while the debtors have the ability to operate stores at most locations, albeit under modified circumstances in some cases,” they said.
J. Crew has not paid them rent for May, the landlords said, indicating that they also believe the retailer may not make full rent payments in June and July. The objecting landlord companies include Brookfield Property REIT Inc., Hines Global REIT and Jones Lang Lasalle Americas Inc.
J. Crew had said in bankruptcy filings this month that while its operations were running at reduced capacity, it wouldn’t be “prudent or in the best interest of the debtors’ estates and creditors” to be paying its $23 million in monthly lease expenses during the first 60 days of its proceedings. The pandemic essentially drove J. Crew to close some 500 stores around the world, according to the retailer, which has also furloughed more than 11,000 employees since April.
In March alone, when lockdowns related to COVID-19 began to go into place around the U.S., the company’s revenue dropped by about 46 percent from March 2019, according to J. Crew. The retailer, which mostly has stores in malls and shopping centers, has about 140 landlords, it said.
“Though the debtors recognize that these locations serve an important purpose in their retail operations, they currently represent a significant strain on the debtors’ operating liquidity,” J. Crew wrote in a filing earlier this month.
When it began its bankruptcy proceedings, J. Crew’s attorneys had said the retailer was still negotiating with landlords. The dispute over rent deferral will be the subject of an upcoming hearing scheduled for May 26. In the meantime, discussions between the retailer and landlords are expected to continue.
A representative for J. Crew declined to comment Wednesday.
The bankruptcy code generally requires companies to pay the bills they incur during the bankruptcy, including rent, which are labeled “administrative expenses” that are generally afforded some priority for repayment.
But in the pandemic era, some retailers have invoked a provision of the bankruptcy code that they say provides a 60-day grace period if they can show “cause” for such an extension.
Courts have appeared to be sympathetic to such asks, while consumers are housebound and nonessential stores have been ordered to temporarily close. In the case of Modell’s Sporting Goods Inc., a New Jersey bankruptcy judge had granted the sporting goods retailer’s request to pause the proceedings, including rent payments, after it filed for Chapter 11 in March.
But those decisions came down earlier in the pandemic, when lockdowns were taking effect, the landlords argued in the J. Crew case.
“At this stage of the COVID-19 pandemic, the debtors can operate at the vast majority of their store locations,” they argued in their filing Monday.