Retail Tenant Bankruptcies
a strengthening economy, the retail sector continues to face challenges. Since
late 2014, several prominent retailers — including Brookstone, Coldwater Creek,
Crumbs Bake Shop, Wet Seal, and most recently, Radio Shack — filed for Chapter
struggling retailers present risks, several strategies can help landlords
protect their investments and minimize the effects of tenant bankruptcy filings.
general, commercial landlords can protect themselves by monitoring their
tenants closely and promptly enforcing lease provisions when a tenant defaults.
Along with seeking unpaid rent or pursuing other state law remedies, landlords
can draw on a security deposit or letter of credit in accordance with lease
provisions. Although the draw on a security deposit may be challenged in a
subsequent bankruptcy, depending on the timing, it could increase the landlord’s overall recovery. Other landlord protections
in default include lease provisions terminating tenant renewal rights and
potential actions against guarantors.
taking these proactive steps, a landlord may be able to terminate a lease,
obtain possession of its space, and avoid the bankruptcy process altogether. In
the event of a subsequent bankruptcy, the following steps could improve the
leverage and potential recovery through the process.
tenant gains a series of statutory protections and rights after it files for
bankruptcy, including some protections that supersede lease provisions.
Bankruptcy creates an automatic stay of any enforcement action against the
tenant outside of the bankruptcy court and imposes penalties for violating this
stay. Tenants may have authority to take actions that violate lease agreements.
Despite enhanced tenant rights, a landlord can take steps to limit the
disruption to its operations and minimize the loss resulting from a tenant
Out of Business Sales. Tenants in bankruptcy often seek authority to conduct
GOB sales at some or all locations, asking for court approval to hang banners,
use sandwich board walkers in common areas, or pass out fliers — which may
violate local ordinances or lease terms.
objecting to the proposed GOB sale terms, the landlord should assert the
objection in the bankruptcy court by the applicable deadline. Reaching an
agreement with the tenant’s bankruptcy counsel or the proposed liquidator also can minimize
inconvenience to the landlord and other tenants.
Rent. After filing for Chapter 11, a tenant is obligated to pay rent until it
rejects the lease (discussed below) and surrenders possession of the leasehold
premises. If a tenant does not promptly pay rent, a landlord can file a motion
with the bankruptcy court to compel immediate payment. Depending on the
jurisdiction of the filing, the landlord also may be entitled to
post-bankruptcy per diem or “stub” rent
for the remaining days in the month of the bankruptcy filing. This right can be
important because retail companies frequently fail to pay rent in the month in
which they file for Chapter 11.
Assumption or Rejection. A tenant in bankruptcy has the right to reject,
assume, or assume and assign a retail lease within 120 days of filing. The
tenant can extend for a 90-day period without the landlord’s consent, but any further extensions require
consent. A landlord should monitor this process and assert its rights if
may reject a lease by filing a motion to relinquish possession on a specified
date. The rejection constitutes a breach of the lease, and the landlord can
obtain authority from the bankruptcy court to terminate the lease at that time.
tenant rejects a lease, the Bankruptcy Code imposes a cap on allowed damages.
The landlord is entitled to a claim equal to the greater of (1) one year’s rent plus additional rent due under the lease
for items such as common area maintenance, real estate taxes, and insurance; or
(2) 15 percent of the remaining lease term, not to exceed three years. In some
instances, the landlord may be entitled to its legal fees or costs for
repairing property damage.
cases, the recovery on this capped claim will be just pennies on the dollar.
However, for retail tenants with substantial assets or that continue as a going
concern following a bankruptcy reorganization or sale, the recovery can be
substantial. A landlord must file a proof of claim by the established deadline.
may assume a lease, by curing all existing monetary defaults and providing “adequate assurance of future performance.” The tenant identifies a proposed cure amount,
but if this amount is incorrect, the landlord should file an objection stating
the correct amount. A landlord may also seek financial information or
additional security to provide assurance of future performance.
bankruptcy law provides a retail tenant with a statutory right to assume and
assign a lease to a third party. Although a landlord may not be able to prevent
the assignment, it may be able to obtain an additional security deposit or
guaranty from the prospective new tenant.
step of the bankruptcy process, a landlord may be required to assert its rights
through timely filings in the bankruptcy court or negotiations with the tenant’s bankruptcy counsel.
Folds is a shareholder in the Washington, D.C., office of the law firm Baker,
Donelson, Bearman, Caldwell & Berkowitz PC. Contact him at email@example.com.