Retail Bankruptcy and the Impact on the Landlord

Bankruptcy, Bankruptcy Everywhere. Landlord, Landlord Have No Fear

Landlords are impacted by retail bankruptcy, too! The hot topic continues to be retail bankruptcies – with no signs of slowing down. We’ve previously discussed what retail bankruptcies mean for creditors who supply inventory, but what about the landlord? Most brick and mortar stores are leased by the retail entity; very few retailers own the building in which they are located.

Read on to learn more about what landlords can do to protect themselves in commercial bankruptcies.

Look Out for the Automatic Stay

The automatic stay is an injunction that stops any and all collection activity against the bankrupt entity and the automatic stay goes in to effect as soon as the bankruptcy petition is filed. The automatic stay impacts ALL creditors, whether supplying an inventory of board games or leasing the property to the bankrupt entity.

However, a landlord may have some remedies available, so long as the landlord seeks bankruptcy court approval first.

In an excellent article by Lars Fuller, Unique Challenges for Commercial Landlords Posed by Large-Scale Retailer Bankruptcies, Fuller explains the actions for which the landlord will need court approval:

• Changing the locks on the premises or engaging in other self-help remedies.
• Commencing or continuing to prosecute an action to evict the debtor.
• Sending notices to the debtor to terminate the lease or revoke a right of lease renewal (even if the lease allows the landlord to take that action).
• Demanding payment of past due rent.

Know the adage “easier to ask for forgiveness than permission?” Yeah, that doesn’t apply to this situation. If you fail to obtain court approval, prior to taking any of the above actions, you may be subject to fines, damages or even held in contempt of court, according to Fuller.

What about the Cash?

We recently discussed DIP financing, and Fuller recommends “Landlords should also review budgets because they often provide the first signal regarding the debtor’s intentions for the Chapter 11 case, including whether it will be maintaining or closing stores and on what timetable.”

And, while you are reviewing those budgets, check to see whether the budget allows for rent payments under administrative claims.

Accept or Reject?

Section 365 of the Bankruptcy Code is specific to the treatment of leases in a bankruptcy. Fuller provides four key issues for landlords regarding the treatment of their leases in bankruptcy:

• Ensuring payment of post-petition rent and other lease charges, including stub rent.
• The effect on the landlord of an assumption of the lease versus a rejection of the lease.
• The circumstances under which the debtor can assign the lease, including the conditions particular to assigning shopping center leases.
• Timing and other strategic considerations.

Ultimately, the bankrupt entity has an opportunity to review its leases and decide whether it is a lease they want to maintain (i.e. reject or accept). The debtor has up to 210 days to make decisions on their leases; decisions should be made within 120 days of the bankruptcy filing, but an extension may be granted for an additional 90 days.

Obviously, money is a driving factor for bankruptcy – if a debtor has some leases that are costlier or more restrictive than others, they will take this as a chance to reject or renegotiate those costly leases. A more favorable lease, such as one that is in a great location & likely seen as appealing to prospective buyers, will likely be assumed or accepted by the debtor. It should come as no surprise, landlords benefit from leases that are assumed or accepted versus those that are rejected.

Pro Advice

Fuller recommends landlords carefully review the bankrupt entity’s pleadings to “discern its intentions for its leases and then evaluate the benefit of joining forces with other landlords or pursuing rights individually.” My recommendation: Make sure you have legal representation! Don’t take on the challenge of legal documentation on your own.