By Mike Cherney 

Gap Inc. is suing high-end-mall operator Westfield for allegedly overcharging the fashion retailer in an action that underscores the sometimes-tense relationship between landlords and tenants as e-commerce transforms the retail sector.

Other well-known U.S. retailers, such as Starbucks and Saks Fifth Avenue, have duked it out with landlords in court recently as they've sought to trim costs amidst a glut of shopping-center space. Mall vacancies in the U.S. recently hit a six-year high, with strip malls and neighborhood centers particularly hard-hit.

Gap's lawsuit, filed in May in a state court in Los Angeles, charges Westfield with using fraudulent accounting that resulted in Gap paying more than its fair share of mall expenses at more than two dozen shopping centers. Gap also sued Westfield's contractors that provided trash collection, including Waste Management Inc., for charging non-competitive rates that were too high.

The lawsuit was filed about a month before European mall operator Unibail-Rodamco closed its acquisition of Australia-based Westfield. A spokesman for the merged company, now named Unibail-Rodamco-Westfield, declined comment, saying that it doesn't discuss pending litigation.

"We take potential allegations very seriously," a Waste Management spokeswoman said, though she declined to elaborate because the matter is ongoing.

The defendants have yet to file a legal response to the case, according to the court docket. Gap, which also owns Banana Republic, Old Navy and Athleta, declined comment beyond what's alleged in the lawsuit.

Mall leases typically allow landlords to charge tenants for their proportionate share of certain expenses, such as taxes and maintenance fees. Disputes over these expenses are common, but landlords and tenants are often able to settle their disagreements without resorting to a lawsuit, lawyers said.

Now, however, the tough retail environment is creating "fertile territory for there to be more challenges," said Douglas M. Bregman, a commercial-real-estate lawyer and senior partner at Bregman Berbert Schwartz & Gilday LLC in Bethesda, Md. "Larger tenants are not thrilled at paying anything that they don't have to pay."

Gap's legal papers say that its proportion of mall expenses was calculated based on the so-called "gross leasable area" of a development. The smaller the area, the more that Gap would have to pay as its share. But Gap says Westfield improperly excluded certain areas of its malls when making the calculation, which increased Gap's bill.

Gap says department stores, and stores with a "primary exterior entrance, " could be excluded from the calculation. However, it argues that vacant department stores can't be excluded -- and that Westfield counted vacant stores as operating stores. It also argues Westfield improperly counted movie theaters as department stores, and that Westfield said some stores had a primary exterior entrance when in fact they did not.

Westfield "prevented plaintiffs from discovering the fact and extent of Westfield's overcharges and other misconduct," Gap said in the lawsuit. For years, it said, Westfield "prolonged this delay by providing incomplete information while purporting to negotiate a settlement concerning the overcharges."

According to the lawsuit, Westfield acknowledged and agreed to pay some of the alleged overcharges, and, in one instance, said it would pay Gap more than $1.8 million. But Gap says Westfield has withheld any payment until a "global resolution" is reached.

Some lawyers said the allegations involving the trash collection were unusual.

Once tenants feel they've been wronged in one way, they start to be "suspect in some other areas," said Nina Roket, co-administrative partner and leader of the leasing practice at New York-based Olshan Frome Wolosky LLP.

Westfield operates marquee malls in the U.S., including the new Westfield World Trade Center in New York and Westfield Century City in Los Angeles. In recent years it sold off smaller, underperforming malls to focus on its higher-end properties, which have held up better in the online era by offering more amenities to keep shoppers interested.

Bruce May, chair of the real-estate department at Jennings Strouss & Salmon PLC in Phoenix, called Gap's lawsuit a "textbook case" that highlights the difficulty in determining how much tenants should pay for mall maintenance fees. He predicted Westfield would settle the case before it goes to trial.

"It raises issues that you may not think of when you're drafting a lease, " he said.

Write to Mike Cherney at Mike.Cherney@wsj.com

(END) Dow Jones Newswires

July 17, 2018 10:22 ET (14:22 GMT)

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