Apple Pull-Out Sparks Defection, Lawsuit

When clothing retailer Lululemon USA Inc. was told Apple was locating at the future 108 State Street development in downtown Chicago (Ill.), they jumped at the chance to locate next-door, and even made Apple’s presence a requirement on their lease signing. When last December Lululemon executives learned Apple had cancelled their plans to open a 6,000 square-foot store on the State Street side of the complex, Lululemon moved to terminate their 10-year lease. The developer, 108 N. State Retail LLC, denied the termination notice, and now Lululemon has filed a federal lawsuit alleging fraudulent inducement and violation of Illinois’ consumer fraud act. Neither the developer or Apple will confirm that Apple originally planned to open a store in the complex. However, tipsters first indicated this location to IFO back in early 2006, and floorplans submitted by the plaintiff in this lawsuit clearly show “Apple” assigned to a space. Apple posted job openings for the location in September 2008.

Apple’s powerful attraction on customers is well-known, but no better defined than in Lululemon’s lawsuit filing. The company says they were approached by the developer, told that Apple would be locating in the building, and offered  a space next door. The company signed a letter of intent for the lease, expressly stating that, “Apple’s co-tenancy at the Shopping Center is a condition of the lease between Lululemon and Defendant.”

The lawsuit says, “Without this express co-tenancy condition, Lululemon would never have considered moving into the Premises.”

Seven months later Lululemon executives signed a 10-year lease on 2,555 square-feet immediately north of Apple’s selection, both facing onto State Street, one of the city’s main thoroughfares. “Before the Lease was executed, Defendant represented to Lululemon that Apple had executed a Lease for retail space at the Shopping Center. Relying on such representation, Lululemon signed the Lease,” the lawsuit states.

The lease contained several provisions that were contingent upon Apple’s presence. First, the developer could relocate the Lululemon store, but no more than 40 feet in either direction, and still adjacent to the Apple store. The lease also made the Lululemon store contingent on several other retailers being present at the development.

The lease also set out provisions in case Apple’s store was delayed in opening, both short-term and long-term. In this case, Lululemon would be allowed to pay a gross sales percentage instead of its stated lease payment, or terminate the lease respectively.

But according to the developer, Lululemon is required to occupy and make lease payments for at least 12 months before it can terminate the lease. Lululemon’s lawsuit contradicts that position, stating, “At no time, however, did the parties ever contemplate or agree that if Apple backed out of the Shopping Center entirely, Lululemon would still be obligated to incur the substantial expense of constructing, opening, staffing, inventorying, marketing, and operating its full retail store for a mere temporary period of twelve (12) months before Lululemon could close its store and terminate the Lease.”

Lululemon’s lawsuit says they learned about Apple’s cancellation in December 2008 through other sources, not the developer. Apple had never signed a lease, the source told the company, and wouldn’t be locating at 108 State Street. “Shortly thereafter, at a New York real estate retail conference,” the lawsuit says, “a representative of Lululemon approached a representative of Defendant about the fact Apple did not sign a Lease with Defendant and would not be opening a store at the Shopping Center. Defendant’s representative, surprised to learn that word got out to Lululemon, had no explanation but did acknowledge Apple would not be opening at the Shopping Center.” A month later, Lululemon submitted their formal notification to cancel the lease, “based on the fact Apple would not be a tenant in the Shopping Center.”

As for the requirement to open a store for 12 months, Lululemon wrote in the lawsuit, “Lulemon is not in possession of the Premises and does not intend to furnish design or construction schedules or otherwise incur the substantial expense of constructing, opening, staffing, inventorying, marketing, and operating its store from the Premises for business in light of the failure of the primary condition of the Lease that Apple opens its store for business next door to lululemon at the Shopping Center.”

Lululemon asked the court to declare that it is not required to open a store, and to uphold their termination notice. The company told the court it would take at least three months and $750,000 in construction and inventory costs to open a retail outlet at the location.

The lawsuit also asks for, “actual damages caused by Defendant’s fraudulent misrepresentations, punitive damages in an amount sufficient to deter Defendant from engaging in such behavior in the future, costs of suit, and all other relief deemed just.”

At least one other retailer has pulled out of the project, whose grand opening has been delayed until September.

Download (pdf) the full lawsuit complaint. Also download (pdf) the lease intent letter and lease conditions.

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Apple would have occupied the 6,076 s.f. space on the right side of the plan, facing State Street. To the north is the in-dispute Lululemon store space. [source: Lululemon lawsuit)