Simon Property Group Inc. is terminating its US$3.6 billion bid to buy Taubman Centers Inc., arguing that its rival mall owner has breached the merger agreement by not taking steps to mitigate the fallout from the coronavirus pandemic.

Simon said in a statement on Wednesday it has “exercised its contractual rights” to terminate the deal, which was announced in February before the pandemic battered malls. The company said it was asking a court to declare that Taubman has suffered a “material adverse event” and “breached the covenants in the merger agreement.”

Taubman didn’t immediately respond to a request for comment.

Taubman’s shares plunged more than 40 per cent to US$26.70 after the statement was released. Its shares have been trading below the proposed deal price of US$52.50 for months, raising speculation that the deal was in trouble.

Simon also dipped on Wednesday, dropping as much as 4.5 per cent to US$82.57. Its shares had rallied recently on hopes for a faster than expected economic recovery

Prospects for bricks-and-mortar retail have changed dramatically since the deal was announced. Stay-at-home orders to curb the spread of Covid-19 have shuttered stores, pushing consumers deeper into online shopping.

Landlords, already pressured by declining foot traffic and retailer bankruptcies, may face a wave of new vacancies as the pandemic forces more tenants out of business.

While Americans stuck inside for months have shown a willingness to return to stores, there are major challenges ahead for enclosed malls.

Simon argued in the statement that the pandemic gives it the right to terminate the deal. It said Taubman had failed to make “essential cuts” in operating expenses and capital expenditures and that the company’s properties have been hit hard by the outbreak.

“Taubman’s significant proportion of enclosed retail properties located in densely populated major metropolitan areas, dependence on both domestic and international tourism at many of its properties, and its focus on high-end shopping have combined to impact Taubman’s business disproportionately due to the Covid-19 pandemic when compared to the rest of the retail real estate industry,” Simon said.