Page 10 - NBIZ October 2020

Landlord’s Choices

When a Retail Tenant

Files Bankruptcy

By Angeline Vachris Kell, Vianey Garza and Haley Kurisky

e are standing on a The “Automatic Stay” Stops All leased space or exercise control over
precipice of a calamity. Actions Against the Tenant 11 premises of the estate is stayed. In other
Numerous retailers have USC 362 words, a landlord could face penalties
Wfiled for bankruptcy At the commencement of bank- from enforcing, collecting or recovering
since COVID-19 began, including ruptcy, the landlord should be aware past due rents or attempting to evict a
J.C. Penney, Lord & Taylor, Neiman that the filing triggers the automatic bankruptcy tenant.
Marcus, Steinmart, Brooks Brothers, stay, which bars all actions taken by
Sur La Table and Chucky Cheese, to creditors against the tenant, also known Sections 365, 502 and 503
name just a few. These retailers have as the debtor. Under Section 362 of Govern Leases
historically been valuable tenants, and the Bankruptcy Code, the landlord’s Sections 365, 502 and 503 govern
landlords renting to them have de- attempts to enforce, collect or recover leases in bankruptcy. Section 365 re-
pended on the leases’ income stream. a claim from the debtor are stopped by quires that the debtor decide whether
Because each tenant and leased space the automatic stay. Further, any it will keep or reject a commercial
case is unique, each bankruptcy act to obtain possession of lease within 120 days of the date
is presenting landlords with novel the bankruptcy case is filed,
challenges. though this deadline may be
extended. If it keeps the lease,
the debtor must generally
cure all monetary defaults.
Sometimes the debtor will pro-
pose to keep the lease and sell
it to a third party under an asset
purchase agreement.
If a debtor decides to reject the lease,
the landlord usually has a fixed time to
file a claim. Unfortunately, the landlord
will only be allowed an unsecured
claim for the default and breach,
the lowest creditor claim’s
priority. Moreover, the amount
of the claim is capped by Section
502(b)(6)(b) to the greater of
rents owed for one year, or 15
percent of the rents, not to exceed
three years following the filing of
the bankruptcy. Additionally, most
courts mandate that the landlord subtract
the security deposit from the calculation.
Thus, landlords can expect pennies on the
dollar if their leases are rejected.

10 NBIZ ■ October 2020