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• W200524750 abstract "In my area of expertise, that of corporate restructurings and reorganizations, the news of late is increasingly replete with stories of adversity affecting many well-known retail chains across the land. Think Kmart and Eddie Bauer, to name just two. This on the heels of a decade or more of Montgomery Wards, Ames, Bradlees, and others too numerous to mention. Landlords may now be ruefully more than familiar with issues that arise in connection with landlord-tenant relationships once an insolvency looms. Rest assured that, given the current state of the economy and lack of prospects for a near-term recovery, a persistent tightening of the retail markets will likely continue, raising the prospect of many more national and regional chains — not to mention single-outlet proprietorships — either seeking bankruptcy court protection or simply closing their doors. By now, many of you unfortunately possess a working knowledge of the bankruptcy court process as it relates to insolvent tenants and, just as understandably, may be less than enthusiastic about any given tenant’s likely sojourn through these proceedings. My comments herein are in response to the headaches (as well as the pains lower on the backside of the anatomy) that can customarily result as one spends months trooping to court to see how the case for a tenant finally turns out. I suggest that you absent yourself from the process entirely by initially exhibiting a greater degree of flexibility at the first sign of a tenant’s financial instability. Ordinarily, you have two basic choices in the event of a prospective bankruptcy by one of your tenants. The first and most desirous of outcomes, assuming the tenant attempts a Chapter 11 reorganization, is to hope for a successful restructuring that will leave the tenant in place with no further rent concessions on your part and with the tenant reaffirming the lease and “curing” any outstanding arrearages due. Generally, should a Chapter 11 end successfully, the bankruptcy code provides that the tenant must cure all amounts due in order to “assume” the lease and return to good standing under it. Importantly, this cure is not simply limited to just the rental amounts outstanding, but picks up CAM charges, real estate tax charges, and the like. A practical benchmark However, as can be seen from the way in which many of the current and rather notorious retail chain bankruptcies are going, the prospect of naively assuming that the Chapter 11 process will work for your tenant — and that a happy outcome will be obtained — may be somewhat far fetched given recent experiences. The practical benchmark that should be used in connection with the process of negotiations is conveniently situated in the bankruptcy code and is known as Section 502(b)(6). This portion of the bankruptcy code sets forth a formula for what are essentially the liquidated damages that a landlord may receive in connection with a tenant’s demise and subsequent vacation of the premises. This section in the bankruptcy code provides what is known as the “cap” to landlords’ claims, and generally sets forth a formula by which the landlord’s claim is maximized at either the rent due for the greater of one year or 15%, not to exceed three years, of the remaining term of the lease. Simply put, what this all means is that if your tenant successfully navigates the distressed waters of insolvency and then returns to financial health — should the tenant elect in that process to vacate your site as one among many it may shrink from — then your claim in its reorganization will be limited to the mathematical formula stated above. Beyond this, there are other issues that landlords deal with on a daily basis in the bankruptcy process that cause one’s appreciation of the proceedings to be diminished measurably. In addition to the “cap” on the maximum recovery by the landlord, there can also be difficulty in showing the property to an alternative tenant while the present tenant continues to occupy it in the throes of its insolvency. There can also be an ability on the part of the bankrupt tenant to schedule a “Going Out of Business” sale at the site, even in defiance of what would be the customary practices for specific retail locations. Combine this with the reality that retail bankruptcies can often go on for some time — and that the oftclaimed ability of landlords to get a tenant to assume or reject the lease within the first 60 days of a bankruptcy can be measurably extended by bankruptcy judges — and one begins to question whether participating in the process for an illusionary reward is really worth the work. Top this off with the fact that — should the tenant choose to vacate the premises and should the lease be considered a potential valuable asset within the bankruptcy estate — the tenant can offer the leasehold for sale even over the landlord’s objections. All of this gives you a virtual cauldron of reasons why the bankruptcy court is not necessarily a landlord-friendly place." @default.
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• W200524750 modified "2023-09-27" @default.
• W200524750 title "Landlords should exhibit flexibility, avoid bankruptcy court headaches GUESTCOLUMN" @default.
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