If you carefully scrutinize the nuances of how bankruptcy impacts leases, you can add a great deal of value to
your owner’s bottom line.
A
ASSUMPTION AND ASSIGNMENT
Tenants can assume and then assign a lease under section
365, which permits assignment in spite of lease provisions
prohibiting transfer. While section 365 does provide for
tenant assignment rights, such rights are intertwined with
obligations, inserted in order to protect owners. Obligations can vary, with shopping center owners having been
singled out for disparate treatment.
Tenants who seek to assign a lease have generally benefitted from a below average rent, facilitating the “sale” of the
lease, with such a sale generating income for the bankrupt
estate. Depending on the gap between the terms of the lease,
and those available in the market, the landlord will determine how to approach the preconditions to assignment.
As you can see, there are a number of grounds on which
a landlord can object to a bankrupt tenant’s assumption
and assignment. Such grounds go well beyond the obvious
question of whether the prospective assignee can pay the
rent. For example, tenants are often required to return the
premises to the condition in which they were leased, with
the exception of normal wear and tear. The difficulty in
fulfilling this obligation is often overlooked. For example,
returning a supermarket to the condition existing at the
time of the lease can cost $1 million, sometimes more.
Real estate managers who are intent on strict adherence
to bankruptcy law requirements can require that the prospective assignee demonstrate its ability to fulfill this and
all other obligations.
Tenant bankruptcy filings are a fact of life and will
remain so for the foreseeable future—perhaps indefinitely.
As a real estate manager, you can learn the rules governing
leases, monitor the market and collect financial information from tenants. By undertaking these and other proactive measures, you will enhance the value of spaces leased
by bankrupt tenants, their neighbors’ leases and the host
properties. With rents and property values often stagnant,
the ability to make the most out of a bad situation is a skill
well worth cultivating. n
OBJECTION TO ASSUMPTION
& ASSIGNMENT IN SHOPPING
CENTER TENANTS
Pursuant to section 365 of the bankruptcy code,
shopping center tenants seeking to assign are required
to provide adequate assurance of future performance,
specifically that:
1 The financial condition and operating performance of
the prospective assignee and any guarantors shall be
similar to the financial condition and operating performance of the debtor/assignor and its guarantors at the
time the lease was executed;
2 The percentage rent payable under the lease will not
fall off substantially;
3 The assignment is subject to all the provisions thereof, including (but not limited to) radius, location, use
or exclusivity provision, and will not breach any such
provision encompassed in any other lease, financing
agreement or master agreement relating to the shopping center; and
4 The assignment of such lease will not disrupt any
tenant mix or balance in such shopping center.
Randall L. Airst Esq., LLM ( randall.airst@airst.com), is a partner and managing director with Airst Stann,
which provides national financial and commercial real estate advisory solutions. For more information
on Airst Stann, including its bankruptcy and turnaround practice group, visit www.airst.com.
