Archives: Commercial Landlords

Recently in the Abengoa SA bankruptcy proceeding (click here to review prior post), the United States Bankruptcy Court for the District of Delaware entered an order permitting Debtors to reject certain nonresidential real property leases (the “Rejection Order”).  Click here for a copy of the Rejection Order.

Through the order, the Debtors have received authorization from the Bankruptcy Court to reject various leases listed on Exhibit 1 to the Rejection Order.  Commercial landlords need to be on alert and pay close attention to this bankruptcy proceeding to ensure that their rights are protected in connection with the Debtors’ rejection of their leases, including being prepared to file a rejection damages claim.

Below is a link to a previous post titled “Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.”  This link provides a brief summary of some of the issues landlords should consider when a commercial tenant files for bankruptcy.

Carl D. Neff is a partner 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.

On April 7, 2016, Pacific Sunwear of California, Inc. (aka PacSun, aka Pacific Sunwear) filed for chapter 11 protection in the United States Bankruptcy Court for the District of Delaware.

Through the bankruptcy, Pacific Sunwear is seeking bankruptcy protection in order to get rid of two thirds of its debt and restore its balance sheet, according to CEO Gary Schoenfeld in a statement. Pacific Sunwear is also looking to reduce the cost of running its stores, either by negotiating with landlords or getting out of leases.

Landlords need to pay close attention to this bankruptcy.  Pacific Sunwear has approximately 600 retail store locations across the country.  Not surprisingly, the Debtors have already filed a motion to establish procedures for rejecting executory contracts and unexpired leases.

Whether Pacific Sunwear rejects store leases, or assumes the leases, the rights of Pacific Sunwear’s commercial landlords will invariably be impacted.  Below is a link to a previous post titled “Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy.”  This link provides a brief summary of some of the issues landlords should consider when a commercial tenant such as Pacific Sunwear files for bankruptcy.

Carl D. Neff is a partner 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.

Not uncommonly, the timing of a commercial tenant’s bankruptcy filing will correspond with a landlord seeking to evict the tenant or institute foreclosure proceedings.  What is the effect of a dismissal requested by a commercial debtor after the landlord has successfully prevailed in the underlying bankruptcy case?  The recent decision of Scarborough-St. James Corporation, case no. 15-10625 (LSS) considered the effect of a debtor’s motion to dismiss its own chapter 11 case after a landlord has gained tactical advantages in the scope of the bankruptcy proceeding.

Background

The bankruptcy case has been dictated by a dispute between Scarborough-St. James Corporation (“Debtor”), and the debtor’s landlord.  Previously in the case, the Court entered an order (the “Rejection/Surrender Order”) directing the surrender of a shopping center owned by Debtor in Richmond, Michigan, as a result of Debtor’s failure to assume or reject the lease pertaining to such shopping center. The Rejection/Surrender Order is subject to appeal.

The Debtor’s present motion to dismiss was filed because, as a result of the entry of the Rejection/Surrender Order, there was no further purpose served for the Debtor to remain in bankruptcy.  Landlord opposed the motion given it gained various rights during the case, and that Debtor filed bankruptcy on the eve of eviction proceedings.

Cause Found to Dismiss the Case Under Section 1112(b)(1)

The Court found that “cause” existed to dismiss the case under 11 U.S.C. Section 1112(b)(1).  The Court found that this matter is truly a two party dispute, and the sole asset of the Debtor are the rents from the shopping center.

Cause Existed Under Section 349 to Condition Dismissal of the Case

However, the Court ruled that Debtor may not file for bankruptcy again for a period of four months from the entry of an order dismissing the case, finding that “cause” likewise exists to condition the dismissal of the case under Section 349(a).

Of note, the Court found that the relief granted by the Court in the Rejection/Surrender Order will be unaffected by dismissal of the case, for three reasons.  First, that order was not entered under one of the enumerated provisions of Section 349(b)(2), and thus will not be vacated upon dismissal.  Second, the “property of the estate” that will revest in the Debtor will be that determined by the Court’s prior orders.  Finally, the Court found that Landlord would be prejudiced by dismissal.  Accordingly, the Court found that “cause” existed to condition dismissal of the case under Section 349(b).

Conclusion

The Scarborough-St. James Corporation opinion is a good illustration of the interplay between Sections 349 and 1112 of the Bankruptcy Code, namely in the context of a commercial landlord/tenant dispute.

Carl D. Neff is a partner 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 cneff@foxrothschild.com.

In a prior post, we discussed the ruling of the Northern District of California Bankruptcy Court in the In re Howrey LLP case, whereby the Court found that claims for unpaid rent of landlords of an involuntary debtor were entitled to priority status. Recently, the creditors’ committee in the Howrey bankruptcy case appealed the decision.  Stay tuned for further updates on this matter.

Carl D. Neff is a partner 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 cneff@foxrothschild.com.

On August 11, 2015, the Bankruptcy Court for the Northern District of California ruled on an issue “of apparent first impression” that claims for unpaid rent brought by landlords for office space leased to the former law firm of Howrey LLP should be given priority status under the Bankruptcy Code.  The case is styled as In re Howrey LLP, C.A. No. 11-31376 (Bankr. N.D. Ca. Aug. 11, 2015), and is an important read for all landlords providing ongoing services to involuntary debtors.

The Court found that consistent with Congress’s intent to protect parties that deal with involuntary creditors, priority status must be provided to so-called “gap claims”.

The Court also rejected the arguments of the Creditors Committee, which opposed priority status, ruling that “[g]ap priority provides an inducement and a protection for parties who deal with involuntary debtors[]”, and that “there is no hint that Congress meant to exclude landlords (or others who have ongoing contractual relationships with debtors when involuntary petitions in bankruptcy are filed against them).”

Carl D. Neff is a partner 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 cneff@foxrothschild.com.

With several significant recent bankruptcy filings such as RadioShack and Saladworks, tenant bankruptcies become a greater risk for commercial landlords. Yet some landlords are not familiar with the rights provided to them under the Bankruptcy Code, nor are they aware of the protections provided to a tenant in bankruptcy. For example, certain lease provisions are unenforceable once a tenant files for bankruptcy. Should a landlord attempt to exercise its rights under the lease without first seeking approval from the bankruptcy court, the landlord may be subject to strong sanctions. The purpose of this article is to provide landlords with the questions and answers they should consider when a commercial tenant files for bankruptcy.

1. What effect does a tenant’s bankruptcy have on the lease?

Once a tenant files for bankruptcy, it has three options regarding the lease: it can assume the lease and continue performing all obligations, or assume and assign the lease to a third party, or reject the lease and surrender the premises and terminate performance. The Bankruptcy Code gives the debtor-tenant 120 days to decide whether to assume or reject the lease. During this period, the tenant can request one 90 day extension to decide what to do with the lease.

If the debtor-tenant fails to assume or reject the lease within the 120 day period, and no extension is granted, the lease is deemed rejected. This is a significant provision for landlords. To be proactive, landlords should review all pleadings filed in the tenant’s bankruptcy proceeding to see if the debtor-tenant sought an extension of time to assume or reject. Additionally, landlords should review the tenant’s motions to assume, motions to assume and assign, as well as motions to reject leases. The exhibits to these motions often contain schedules identifying the leases affected by the motion.

2. How does the “automatic stay” of the Bankruptcy Code apply to landlords?

The automatic stay is one of the most powerful protections provided to debtors in a bankruptcy proceeding. The stay acts as an injunction that prohibits creditors (including landlords) from commencing or continuing any proceeding against the debtor which could have been commenced prior to the bankruptcy. Before a landlord seeks to enforce its rights under the lease (such as through eviction, termination or foreclosure), the landlord should seek “relief” from the automatic stay by filing a motion with the bankruptcy court.

It is important for landlords to realize that the automatic stay becomes effective without notice or a hearing. Were a landlord to be found in violation of the automatic stay, the debtor-tenant may be able to recover actual damages from the landlord, including attorneys’ fees. If the violation is found to be intentional, the debtor-tenant may recover punitive damages.

3. What is the status of the tenant’s rental obligations while in bankruptcy?

While in bankruptcy, the Bankruptcy Code requires the debtor-tenant to satisfy all terms under the lease until the tenant either rejects the lease, or assumes and assigns it to a third-party. The landlord’s claim for unpaid rent receives “administrative claim” status, which is a higher priority of claim than many of the other claims against the debtor. Creditors holding an administrative claim against the debtor will receive payment on their claims before “unsecured creditors,” to the extent funds are available.

Should the debtor-tenant fail to pay the rent as provided under the lease, the landlord should file a motion for payment of administrative rent with the bankruptcy court. The rent motion in some instances can be heard within thirty to sixty days from the date in which it was filed. However, if an evidentiary hearing is needed to resolve the motion, several months could pass before the court issues a decision.

4. What are the landlord’s “rejection damages”?

If the debtor-tenant seeks to terminate and surrender the lease, that is “reject it”, the landlord may be entitled to a “rejection damage” claim. A landlord is not entitled to the full amount of unpaid rent due under the lease. Instead, the Bankruptcy Code limits the recovery a landlord may receive for rejection damages. The landlord’s rejection damage claim is capped at the greater of one year’s rent, or 15% of the rent due under the lease, not to exceed three years’ rent.

To determine the amount of the rejection damage claim, the landlord should first determine the amount of damages it is entitled to under lease, regardless of the Bankruptcy Code’s cap on rejection damages. If the total amount of the landlord’s claim is less than the amount of the cap, the Code’s limitation on damages does not apply.

5. What are the landlord’s rights when the debtor-tenant decides to assume the lease?

Assumption of the lease is permissible even if the terms of the lease expressly prohibit assumption. Before a debtor-tenant can “assume” a lease, the tenant must cure all monetary and non-monetary defaults. Additionally, the debtor-tenant must provide the landlord with adequate assurance that the tenant will be able to perform under the lease going forward.

A debtor-tenant must serve the landlord with notice of its intention to assume the lease. The debtor may provide notice of its intent to assume in either a motion to assume, or a plan of reorganization. Regardless of the method, under either approach the landlord has only a limited amount of time to review and file an objection to the assumption of its lease and/or the proposed cure amount. If the landlord chooses to object to the assumption of its lease, it needs to file a written objection with the court.

6. What are the landlord’s rights when the tenant assumes and assigns the lease to a third-party?

In conjunction with assuming the lease, the Bankruptcy Code allows the debtor- tenant to assign the lease to a third party. The party who is assigned the lease must provide the landlord with adequate assurance that it can meet the financial obligations of the lease. If the party who is assuming the lease cannot provide the landlord with adequate assurance, the landlord can object to the assignment.

Bankruptcy courts often apply the “business judgment” standard when considering whether to allow a tenant to assume and assign a lease. Under this standard, a debtor-tenant can assign a lease provided it can show the transfer of the lease is a reasonable business decision. Although courts provide debtor-tenants with broad discretion on the decision of whether to assume and assign a lease, the debtor-tenant must still demonstrate the assigned party’s ability to cure defaults under the lease and make future payments.

7. How does a landlord recover its administrative rent claim?

The Bankruptcy Code requires the debtor-tenant to timely perform all obligations under the lease until such time that the tenant assumes or rejects the lease. If a tenant files for bankruptcy and maintains possession and use of the property, yet fails to pay rent, the landlord should consider filing a motion for an administrative claim.

Although the landlord is entitled to the fair market value for purposes of determining the amount of its claim, the rental amount provided in the lease is presumed to be the fair market value. If the tenant believes it is entitled to pay an amount less than the rate provided for in the lease, the tenant must show why the contract rate is not fair market value.

8. When can a landlord recover attorneys’ fees from a tenant in bankruptcy?

Landlords may be able to recover attorneys’ fees incurred when a debtor-tenant seeks to assume the lease, or assume and assign the lease to a third party. To recover attorneys fees, however, the landlord must meet several criteria. First, the lease must expressly state that the landlord is entitled to recover attorneys’ fees as additional rent or in connection with the collection of rent. Next, the landlord must have prevailed in the proceedings in which it seeks to recover attorneys’ fees. “Prevailing” in a bankruptcy proceeding may include filing an objection to a motion of the debtor-tenant and receiving a favorable decision (i.e., objecting to the cure amount proposed by the tenant).

The matter in which the landlord seeks attorneys’ fees must be in pursuit or enforcement of the landlord’s rights under the lease, not matters where the landlord challenges the debtor-tenant’s rights under the Bankruptcy Code. Finally, the attorneys’ fees must be reasonable. To determine whether fees are reasonable, courts will consider factors such as the amount in dispute relative to the fees requested, the debtor-tenant’s good faith efforts to resolve the dispute and compliance with the Bankruptcy Code.

9. Can the landlord apply the tenant’s security deposit to the landlord’s claims?

Security deposits are considered property of the bankruptcy estate, and as such, are generally required to be returned to the debtor. Even so, landlords are permitted in some instances to setoff their claim against the security deposit. This benefits a landlord in two ways. First, instead of returning the deposit to the debtor-tenant, a landlord can setoff its claim against the deposit, and thus reduce the amount of the deposit that must be returned. Second, the landlord’s rejection damage claim is a general unsecured claim, meaning it gets paid after all other types of claims under the Bankruptcy Code. However, by applying the security deposit, the landlord is more likely to receive payment ahead of other unsecured creditors.

Landlords should not setoff any claims they have against a debtor-tenant’s deposit without first seeking permission from the bankruptcy court. If the parties reach an agreement as to the amount of the claim to be applied to the deposit, the debtor-tenant may consent to the landlord’s use of the deposit.

10. How can a landlord protect itself prior to and during a bankruptcy?

Requiring a third-party guarantor is one way in which a landlord may obtain better creditor protection when entering into a lease. The Bankruptcy Code 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 should the tenant default under the lease. Letters of credit are generally not considered property of the tenant’s bankruptcy estate.

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, it 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 file an objection to the assumption. This deadline is also significant as a landlord may dispute whether the party assigned to the lease is capable of complying with the terms of the lease.

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 cneff@foxrothschild.com.

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 cneff@foxrothschild.com.

Security deposits are considered property of the bankruptcy estate, and as such, are generally required to be returned to the debtor.  Even so,  landlords are permitted in certain instances to setoff their rejection damage claim against the security deposit.  This benefits a landlord for two reasons.  First, instead of returning the deposit to the debtor-tenant, a landlord can setoff its claim against the deposit, and thus reduce the amount of the deposit that must be returned.  Second,  the landlord’s rejection damage claim is a general unsecured claim, meaning it gets paid after all other types of claims under the Bankruptcy Code.  However,  the landlord’s rejection claim can be setoff against the security deposit “dollar for dollar,” which in essence raises the status of the rejection claim to secured status, up to the amount of the security deposit.

Landlords should not setoff any claims they have against the debtor-tenant’s deposit without first receiving an order from the bankruptcy court granting the landlord relief from the automatic stay.  If the parties reach an agreement as to the amount of the claim to be applied to the deposit, the debtor-tenant may consent to relief from the automatic stay.

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 cneff@foxrothschild.com.

Landlords may be able to recover attorneys’ fees incurred when a debtor-tenant seeks to assume the lease, or assume and assign the lease to a third party.  To recover attorney’s fees, however, the landlord must meet several criteria.  First, the lease must expressly state that the landlord is entitled to recover attorneys’ fees as additional rent or in connection with the collection of rent. Next, the landlord must have prevailed in the proceedings in which it seeks to recover attorneys’ fees.  “Prevailing” in a bankruptcy proceeding may include filing an objection to a motion of the debtor-tenant and receiving a favorable decision (i.e., objecting to the cure amount proposed by the tenant).

The matter in which the landlord seeks attorneys’ fees must be in pursuit or enforcement of the landlord’s rights under the lease, not matters where the landlord challenges the debtor-tenant’s rights under the Bankruptcy Code. Finally, the attorneys’ fees must be reasonable.  To determine whether the fees are reasonable, courts will consider factors such as the amount in dispute relative to the fees requested, the debtor-tenant’s good faith efforts to resolve the dispute and compliance with the Bankruptcy Code.

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 cneff@foxrothschild.com.

Section 365(d)(3) of the Bankruptcy Code requires the debtor-tenant to “timely perform all the obligations …. under any unexpired lease of nonresidential real property” until such time that the tenant assumes or rejects the lease.  If a tenant files for bankruptcy and remains in possession of the property, yet fails to pay rent as provided for under the lease, the landlord should consider filing a motion for an administrative claim.

In drafting the Bankruptcy Code,  Congress intended for tenants who remain in possession of property to abide by the terms of the lease.  If the debtor-tenant maintains possession and use of the property,  the tenant is receiving a benefit and the landlord is entitled to an administrative expense claim.  Although the landlord is entitled to the “fair market value” for purposes of determining the amount of its claim, there is a presumption that the rental amount provided in the lease represents fair market value. If the tenant believes it is entitled to pay an amount less than the rate provided for in the lease, it has the burden of showing why the contract rate is not fair market value.

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 cneff@foxrothschild.com.