Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/475894
March | April | 2015 Commercial Investment Real Estate L EG AL BRIE F S wiratgasem/Thinkstock d Despite a strengthening economy, the retail sector continues to face challenges. Since late 2014, several prominent retailers — including Brookstone, Coldwater Creek, Loehmann's, Crumbs Bake Shop, Wet Seal, and most recently, Radio Shack — fi led for Chapter 11 bankruptcy. While struggling retailers present risks, several strategies can help landlords protect their investments and minimize the effects of tenant bankruptcy fi lings. session of its space, and avoid the bankruptcy process altogether. In the event of a subse- quent bankruptcy, the following steps could improve the landlord's leverage and potential recovery through the process. After a Tenant Files A retail tenant gains a series of statutory protections and rights af er it f les for bank- ruptcy, including some protections that supersede lease provisions. Bankruptcy creates an automatic stay of any enforce- ment action against the tenant outside of the bankruptcy court and imposes penal- ties for violating this stay. Tenants may have authority to take actions that violate lease agreements. Despite enhanced tenant rights, a landlord can take steps to limit the disrup- tion to its operations and minimize the loss resulting from a tenant f ling. Going Out of Business Sales. Tenants in bankruptcy of en seek authority to conduct GOB sales at some or all locations, asking for court approval to hang banners, use sandwich board walkers in common areas, or pass out f iers — which may violate local ordinances or lease terms. If objecting to the proposed GOB sale terms, the landlord should assert the objec- tion in the bankruptcy court by the appli- cable deadline. Reaching an agreement with the tenant's bankruptcy counsel or the pro- posed liquidator also can minimize incon- venience to the landlord and other tenants. Demand Rent. Af er f ling for Chapter 11, a tenant is obligated to pay rent until it rejects the lease (discussed below) and surrenders possession of the leasehold premises. If a ten- ant does not promptly pay rent, a landlord can f le a motion with the bankruptcy court to compel immediate payment. Depending on the jurisdiction of the f ling, the landlord also may be entitled to post-bankruptcy per diem or "stub" rent for the remaining days in the month of the bankruptcy f ling. T is right can be important because retail compa- nies frequently fail to pay rent in the month in which they f le for Chapter 11. Lease Assumption or Rejection. A tenant in bankruptcy has the right to reject, assume, or assume and assign a retail lease within 120 days of f ling. T e tenant can extend for a 90-day period without the landlord's con- Retail Tenant Bankruptcies Commercial landlords must know their rights to limit their risks. by David Folds Early Due Diligence In general, commercial landlords can pro- tect themselves by monitoring their tenants closely and promptly enforcing lease pro- visions when a tenant defaults. Along with seeking unpaid rent or pursuing other state law remedies, landlords can draw on a secu- rity deposit or letter of credit in accordance with lease provisions. Although the draw 18 on a security deposit may be challenged in a subsequent bankruptcy, depending on the timing, it could increase the landlord's over- all recovery. Other landlord protections in default include lease provisions terminating tenant renewal rights and potential actions against guarantors. By taking these proactive steps, a landlord may be able to terminate a lease, obtain pos-