Retail Tenant Bankruptcy  | Landlord Representation | Chapter 11 Highlights

Our Dallas and New York landlord bankruptcy attorneys representing landlords have complied a list of issues to be considered when a retail tenant bankruptcy filing is imminent.

Administrative Rent

The first issue facing landlords of tenants in bankruptcy is securing payment of rent.  When tenants file for bankruptcy protection after the date on which rent is due, the filing of the bankruptcy petition effectively allocates the rent into two parts – first, that portion due for the days prior to the bankruptcy filing and, second, that portion allocable to the days remaining in the month after the bankruptcy filing. The rent for the period beginning on the petition date through the end of the first month of a bankruptcy case is often referred to as “stub rent.”  Upon the filing of bankruptcy by a tenant, landlords may assert a claim for immediate payment of the “stub rent.”

Bankruptcy courts in different jurisdictions treat “stub rent” differently.  Courts which have adopted the “proration” approach hold that a debtor is obligated to timely pay the pro rata amount of rent from the petition date through the end of the first month.  Other courts hold that because rent becomes due and payable in full on the first of the month, the rent for the entire month is a pre-bankruptcy obligation.  In these “billing date” jurisdictions, the landlord must typically file an application for an administrative claim and establish the value of the debtor’s post-petition use and occupancy of the premises.

In short, under the “billing date” approach, there is no claim for immediate payment of “stub rent,” whereas under the “proration” approach, the landlord may make a claim for immediate payment of “stub rent.”

Assumption and Assignment of Leases

Although most commercial leases prohibit assignment of the lease without the consent of the landlord, the Bankruptcy Code deems these provisions unenforceable.  As a result, retail debtors often attempt to monetize below-market leases by selling their rights in these leases.

Even though a retail debtor may assign its leases, commercial landlords are not left without any rights in the process.  First, the debtor must cure any monetary defaults, such as payment of past-due rent, before assigning the rights to the lease to a third party.  In such instances, landlords should carefully monitor any proposed cure and object if the debtor proposes an incorrect amount or seeks to delay payment of the cure amount.  Landlords also maintain certain control over the identity of a new tenant.  For example, a debtor must provide adequate assurance that any new tenant will comply with all provisions of the lease going forward, including nonmonetary provisions.  In addition, the Bankruptcy Code includes certain protections for shopping centers to preserve tenant mix and balance.

Going-Out-of-Business Sales

An oft-used strategy of bankrupt retailers is to eliminate unprofitable locations and then emerge from bankruptcy without the burden of these lease obligations.  Additionally, not all retailers reorganize in bankruptcy and will simply liquidate their inventory at all locations.  In both scenarios, debtors must seek bankruptcy court approval to hold going-out-of-business sales at their store locations. Landlords should seek to limit such sales by taking a proactive stance in the bankruptcy case and, where such sales are permitted to take place, negotiate with the debtor to limit the negative aspects of the sales regarding such things as signage, duration of sale, returns procedures and other matters per the debtor’s consent to certain sale guidelines.

Rejection of Leases

Debtors will seek to reject undesirable leases which may involve profitability or other issues regarding the store.  Rejection of a commercial lease is treated as a breach of that lease effective immediately prior to the time the debtor files for bankruptcy.  Where a lease is rejected, landlords should file a proof of claim with the bankruptcy court setting forth its damages incurred as a result of the rejection and include claims for pre-petition lease obligations as well.  Generally, landlords should not delay filing proofs of claim following lease rejection, because many lease rejection orders include a deadline to file a claim or there may be a general bar date order which provides for a certain time period to file such lease rejection claims.

Conclusion

When faced with the bankruptcy of a tenant, commercial landlords should take early, proactive steps to protect their rights.

Contact Us:

Dallas: Richard G. Grant, Partner | Direct: 214-210-2929
New York: Robert W. Dremluk, Partner | Direct: 516-883-2759