Delshah Sues Free People For $11M After Terminating Lease

The list of lawsuits between retail tenants and landlords grows longer by the day. More than demanding a few months in rent arrears, some landlords are now going all out to demand that tenants pay up the full value of their leases.

Michael Shah’s Delshah Capital is one landlord taking that hardline approach against Urban Outfitters subsidiary Free People. Delshah’s retail tenant at 58-60 Ninth Avenue in the Meatpacking District stopped paying rent in the early days of the coronavirus pandemic.

In a lawsuit filed late last month, Delshah says it terminated Free People’s lease on June 10 after the retailer missed two months’ rent. The suit seeks damages equal to back rent plus “all rent that would have been due for the remainder of the lease term” for a total of nearly $11 million.

The 6,800-square-foot Free People lease was set to expire in January 2027 and is worth $1.4 million a year, loan documents show. The property also has three residential units whose total annual rent was $297,600 in 2017.

Although the tenant paid a portion of its arrears in late May, the landlord says that this was not enough to cure the default on the lease. Delshah and Urban Outfitters did not respond to requests for comment.

Free People’s relationship with the landlord had been strained from the start, when Delshah delivered the space to the tenant more than a year later than planned, in the summer of 2016.

Claiming that the delay caused it to miss the 2015 holiday retail season and damaged its reputation and stock price, Free People sought 825 days of rent credit or nearly $3.2 million in damages. A judge eventually ruled that Delshah owed just $650,000 for the delayed delivery.

Delshah acquired the 11,000-square-foot mixed-use building for $18.2 million in 2013. In 2017, the developer secured a $28 million CMBS loan for the property along with another nearby retail building at 69 Gansevoort Street. Delshah sought Covid-19 relief for the loan in April, according to servicer commentary. The loan became more than 30 days delinquent in May but is now current.

Urban Outfitters announced in late March that it would not be paying rent at stores closed due to coronavirus. Urban Outfitters’ Herald Square landlord, Empire State Realty Trust, also sued the retailer last month over $1.2 million in unpaid obligations.

A similar lease termination dispute is playing out at a Gap store in the Financial District, where landlords Crown Acquisitions and Prime Property Fund are seeking to terminate Gap’s lease in a move that could leave the retailer on the hook for more than $60 million in future rent.

In other legal proceedings, Delshah recently secured two money judgments totalling $5.6 million against developer Jack Terzi, in connection with distressed notes on the retail condos at 27 West 72nd Street and 31 East 28th Street. Terzi had earlier accused Delshah of “colluding” with lender Signature Bank to manufacture defaults on the two notes.