A bankruptcy court judge is giving menswear seller Tailored Brands permission to walk away from 100 retail leases including high-profile locations in downtown Chicago, Houston and in the World Trade Center district in New York City, a move that's becoming more common for national retailers struggling during the coronavirus.
Judge Marvin Isgur is letting Tailored Brands, the owner of Men’s Wearhouse and Jos A. Bank, reject roughly 100 retail leases across the United States as part of its filing for Chapter 11 bankruptcy protection.
The locations include several notable spots in busy business and shopping districts, such as stores at 111 Broadway near the World Trade Center in Manhattan, Accenture Tower and Clybourn Galleria in Chicago, Brookfield Properties' Houston Center in downtown Houston, Westheimer Road location near Houston's Galleria mall, Washington Square Mall in Portland, Oregon, and Union Station in Washington, D.C.
With the rejections, Tailored Brands is expected to walk away from the unexpired leases, leaving landlords with millions of square feet in empty retail spaces across the United States to fill on short notice during a pandemic. For many landlords, it won’t be clear how much they might receive in unpaid rent until the bankruptcy process is complete.
Tailored Brands joins the list of retailers rejecting the agreements as the retail industry sees a wave of bankruptcies related to the coronavirus. Neiman Marcus is also rejecting leases at high-profile locations such as its Hudson Yards location in New York City.
“In these retail cases, landlords are taking the hardest hit without a doubt. Their spaces are being abandoned in the midst of the pandemic and brick-and-mortar dying and they have few prospects to fill these spaces,” said Eric Horn, partner at the New York law firm A.Y. Strauss LLC, who is representing one of Tailored Brands’ New Jersey landlords in the case.
“Not only are they losing an historically good tenant, they are faced with a situation where they’re just not going" to be able to get a new tenant, or if they do it will likely "be substantially different rent from where it was,” said Horn, who often works with landlords in bankruptcy cases.
Tailored Brands didn’t officially notify many of its landlords they intended to close the stores until the firm filed for bankruptcy a few weeks ago, Horn said. “The parties were aware that there were issues, but landlords became more aware when employees were packing up boxes,” he added.
A spokeswoman for Tailored Brands declined to comment.
Landlord Damages Limited
Under U.S. bankruptcy code, landlords generally are limited on the damages they can claim under a rejected lease, often they can only claim a percentage of the unpaid rent, potentially missing out on hundreds of thousands of dollars, Horn noted. In the Tailored Brands case, although a plan and disclosure statement was filed, Tailored Brands did not disclose how much it expects to pay for unsecured claims, so landlords do not yet know what their anticipated payments will be, Horn said.
The Aug. 27 order represents the first batch of official lease rejections in the Tailored Brands case but dozens more are expected to follow after Igsur also approved an order that streamlines the rejection process.
Since filing for bankruptcy Aug. 2, Tailored Brands already has closed 278 stores and planned to close an additional 90 outlets by Aug. 29, said Aparna Yenamandra, an attorney for Tailored Brands with Kirkland & Ellis, in an Aug. 27 hearing in the U.S. Bankruptcy Court for the Southern District of Texas in Houston.
Ultimately, Tailored Brands has said it plans to close 500 unprofitable locations, but so far has not released a list of which locations it plans to close.
The company had 1,274 retail locations across the United States and 125 stores in Canada when it filed for bankruptcy, according to court filings. That encompassed 9 million square feet of retail space and about $416 million in occupancy costs, wrote Holly Etlin, Tailored Brands’ chief restructuring officer, in court filings. The retailer also owned 1.8 million square feet of distribution space and leased another 6 million square feet of distribution space, she said.
At the time, Etlin said Tailored Brands had arranged for rent deferral payments with 470 landlords for the months of April and May.
The retailer is continuing to negotiate with all of its landlords to try to secure additional rent reductions or other relief to reflect the “evolving retail market,” said Yenamandra with Kirkland & Ellis during the hearing. She added all of Tailored Brands remaining stores are open and operational with only one location closed because of recent civil unrest.
Beyond closing locations, Etlin said Tailored Brands is beefing up its e-commerce presence and developing new designs that fit into the trend of the workplace becoming more casual, such as a stretch dress shirt.
Tailored Brands already has reached a restructuring deal with most of its senior lenders. Some lenders are expected to receive equity stake in the restructured company at the close of the bankruptcy case, according to court filings.
The menswear brand was struggling even before the pandemic as consumers increasingly favored casual clothing trends and online shopping. The pandemic accelerated the trend toward casual wear as social-distancing mandates forced many office workers to stay home and the widespread cancellation of large events diminished demand for formal wear. In July, menswear icon Brooks Brothers and the owner of women’s office wear retailer Ann Taylor both also filed for bankruptcy protection. The parent of Lord & Taylor also filed for protection from creditors in August.
Tailored Brands, which has a split headquarters between Houston and Fremont, California, has roughly 18,000 employees globally. The retailer also owns the brands Tux, K&G and Moores and has corporate offices in New York City and Hampstead, Maryland.