Real Estate Journal — 2017 Forecast — January 27 - February 9, 2017 — 3C
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M id A tlantic
T enant B ankruptcy
f you are a commercial landlord these days, you’ve probably had one By William J. Levant, Kaplin Stewart Anyone for poker? How commercial landlords can properly handle chain tenant bankruptcies I falls into is extremely use- ful information. If a lease contains reporting require- commercial leasing world; the debtor will almost certainly refuse to share any financial
to the debtor would make financial sense under the pro- posed terms. If the answer is “no”, then one valid strategy is to refuse the proposed con- cession, and be ready for the lease to be rejected. However, if the location is profitable for the debtor, the lease might be assumed anyway; if this happens, you have called the debtor’s bluff. Another useful strategy in responding to a demand for concessions is to make a coun- terproposal with an “early out” to protect the landlord. If a lease has many years to run, but the landlord doesn’t
want to rent to the debtor long-term (and doesn’t have any short-term prospects to re-rent the space), and is rea- sonably certain that -- with- out concessions -- its lease will be rejected, the landlord might agree to concessions that would ordinarily not be acceptable, in exchange for the ability to terminate the lease years before its scheduled expiration date. Since most bankruptcy reor- ganizations fail, this would protect the landlord from being locked into a long-term discounted deal with a debtor continued on page 18C
(or more) of your nation- al chain ten- ants file for bankruptcy within recent m e m o r y . Though the Bankruptcy Code gives
“Generally, a landlord can force a debtor to decide whether to assume or reject a lease, but can’t force the debtor to pick one over the other. Still, applying the psychology of a poker player to the demand for concessions can often lead the debtor in the landlord’s preferred direction.”
William Levant
information about a particu- lar location with that loca- tion’s landlord. When a demand for conces- sions comes in, the landlord’s first task is to determine whether continuing to lease
ments, then the landlord might be able to estimate the store’s profitability from information that it already possesses. If not, the landlord could perhaps gain insight from talking to others in the
Chapter 11 debtors an almost absolute right to walk away from unprofitable leases, some national chain debtors have used that power as a weapon, in order to extract significant concessions from their landlords. Landlords often give those concessions, because they think that they have little or no choice, and that half a loaf (or, more accu- rately, half a lease payment) is better than none. It doesn’t have to be that way. Here’s how the game usually goes. THE GROUND RULES Under the Bankruptcy Code, debtors have up to 210 days from their bankruptcy filing date within which to decide whether to keep (“as- sume”) or walk away from (“reject”) their leases. During that time, the Code requires the debtor to pay rent each month to each landlord whose real property continues to be used for the operation of the debtor’s business. If a debtor doesn’t pay post-petition rent automatically, take it as a sign that the squeeze is com- ing. Meanwhile, you may safe- ly assume that the debtor knows, before even filing its bankruptcy petition, exactly which of its locations are solidly profitable, which gen- erate only a middling profit (but could make money with landlord concessions) and which are absolutely irre- deemable dogs. Nevertheless, the debtor will probably ask all of its landlords for rent conces- sions, and might even ask the “dog” landlords for greater concessions than the others, on the premise that there’s no harm in asking; if a “dog” landlord balks, they simply walk away from that location. RESPONDING to the DEMAND for CONCES- SIONS – KNOWLEDGE is POWER For a landlord, knowing which category its location
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