Retail Tenants and Landlord Bankruptcy

Summary taken from NREI

We are starting to see quite a bit of fallout regarding retail tenants and landlord bankruptcy. As  retail tenants experience more difficulties from COVID 19 such as government shutdowns and shelter in place orders business is greatly affected. Even though there is some lifting of restrictions, the damage being done will be long. As a result, there is a rise of bankruptcy filings by commercial landlords.  What should retail tenants do to protect their rights during a landlord bankruptcy?

Landlord files for bankruptcy

When a landlord files for bankruptcy, they can keep in place or reject it’s unexpired tenant’s leases.  Within the Bankruptcy code there are provisions regarding this that do not change the terms of a lease. If you are a tenant and are not familiar with bankruptcy law (most are not) a tenant can run the risk of losing lease rights.  The unprepared tenant could lose potential opportunities within bankruptcy to improve the position of its lease. The position would be via other tenants and creditors of the landlord. 

Assuming and Retaining a lease

To assume and retain a lease , the landlord must cure all breaches. All monetary breaches are done at 100 cents on the dollar.  Retaining income from tenants is of the upmost importance to a landlord in commercial real estate. This is especially important for leases signed before the pandemic. Before the pandemic, leases garnered higher lease rates in Austin. For you as the retail tenant, retaining above market lease rates is not that appealing.  However, the bankruptcy code requires landlords to cure all existing defaults prior to lease assumption. Some lease defaults such as janitorial services for tenants are not required to cure. Tenants are compensated for damages due to non payment of tenant improvements. Also damages can be claimed for not maintaining the property. Landlords can only assume a lease after adequate assurance of future performance is complete.

Renegotiation

Landlords must by law cure breaches. This presents a good opportunity for a retail tenant to renegotiate their existing lease for more favorable terms. The tenant may accomplish by carefully analyzing its existing lease. They should provide a detailed and documented list of the landlord’s past and ongoing breaches. The lease analysis should include “measurable money loss” from defaults and also important non-monetary breaches that negatively affect the value of the leasehold.

For more information regarding bankruptcy and commercial real estate, a retail tenant should contact a CRE attorney.