With the RadioShack Corporation bankruptcy action affecting the rights of many commercial landlords, it is important to determine ways that landlords can protect themselves during the course of the bankruptcy action.
First, requiring a third-party guarantor is one way in which a landlord may obtain better creditor protection when entering into a lease. The automatic stay does not prevent a landlord from taking action against a guarantor to a corporate debtor-tenants’ lease, provided the lease guarantor is not in bankruptcy.
Landlords can also seek protection through letters of credit. Using a properly drafted letter of credit allows a landlord to draw on the proceeds of the letter of credit from a third party (the lender) should the tenant default under the lease. Letters of credit are generally not considered property of the tenant’s bankruptcy estate. Some of the drawbacks to letters of credit include their complexity, both during lease preparations, as well as execution after default.
Once a tenant files for bankruptcy, it is important that the landlord stay informed regarding the status of the proceedings. This is especially true regarding claims bar dates and objection deadlines. If a landlord misses the deadline in which to file a claim, whether for rejection damages, administrative claims, or any other related expenses, the landlord may be barred from recovering on its claim. Similarly, if the debtor files a motion to assume the lease and assign it to a third party, landlords have a very limited amount of time to prepare and file an objection to the assumption. This deadline is also significant as a landlord may dispute the amount of cure provided by the landlord, or the landlord could dispute whether the party assigned to the lease is capable of complying with the terms of the lease.
Specifically, in the RadioShack Corp. bankruptcy case, various pleadings have been filed of consequence to commercial landlords, including a “first day” rejection procedures order, which authorizes the Debtors to implement procedures to reject certain of its leases.
Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP. Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at firstname.lastname@example.org.