A panel of appeals judges ruled in favor of a Times Square landlord in its first crack at pandemic-related retail rent disputes.

The Appellate Division of the New York State Supreme Court ruled that Gap, which leases retail space at 1516 Broadway for locations of The Gap and Old Navy, must pay rent to its landlord even as it tries to sue its way out of its lease.

Gap filed a lawsuit against the landlord in June claiming that the coronavirus pandemic had made the retailer unable to operate its business as it presumed to be able to when the lease was signed, and asked that the court nullify the lease moving forward.

The four-judge appellate division’s decision reversed a lower court's ruling that the retailer should pay its rent to the court to be held in escrow while the rent-dispute case was being decided. The Gap owes a combined $2.95M every month across the two leases, and all of the rent collected by the court since the injunction in July has been ordered paid to Bow Tie Partners.

The court further ruled that The Gap must continue paying rent on the two storefronts at a 10% discount until the full dispute is resolved.

"We feel that this decision is a momentous victory for landlords," said Alexander Estis, an associate at Rosenberg & Estis P.C. who is on the team representing Bow Tie Partners.

In July, New York State Supreme Court Justice Debra James granted the retailer’s request for a “yellowstone injunction,” meaning that the landlord could not terminate the lease while the case was being decided.

The appellate court found that since Gap and Old Navy are “continuing to use and occupy the premises as a retail business” amid the injunction, rent should be paid to the landlord, the judges ruled in a two-page order.

“The Court abused its discretion in failing to require that ongoing use and occupancy, at the temporarily reduced amount, be paid directly to [the landlord],” they wrote in the order.

The ruling gives insight into how the appellate court, which hears appeals of state Supreme Court cases, could act on cases like this in the future, said Warren Estis, co-founder and member of Rosenberg & Estis P.C. The appellate division's ruling could be appeal to the state's highest court, the Court of Appeals.

“With this case, you have an appellate court giving an indication on how they are going to deal with these issues,” Estis said. “When you have the ability [to use] the space, the money should be paid to the landlord.”

Gap was one of many retailers that waged cases against their landlords to get out of their leases this spring and summer. Many of the retailers argued that business as usual was no longer possible under COVID, thus changing their responsibilities under the lease.

Legal experts told Bisnow at the time that these cases were a “Hail Mary” on the part of the retailers who have been hit hard by the pandemic.

Warren and Alexander Estis represented the landlord with Norman Flitt and Alexander Lycoyannis, while the tenant was represented by Joshua Epstein, a partner at Davis & Gilbert LLP. Epstein didn't respond to requests for comment.