Transcript Slide 1
TENANT
BANKRUPTCY
Presented by
GARY S. KESSLER
KESSLER & COLLINS, PC
5950 SHERRY LANE, SUITE 222
DALLAS, TX 75225
GOALS
Obtain control of space
Determine amount and type of claim –
whether to pursue or seek termination by
Debtor
Stay on top of the case and in front of the
Debtor
LANDLORD
Creditor
Provider of Services after Filing
Holder of Unexpired Lease
Special Claim Rules
Storage Company
TOP TEN THINGS TO REMEMBER TO MAKE A
LANDLORD’S LIFE LESS STRESSFUL IN A TENANT
BANKRUPTCY
10. If the tenant/debtor can, it will ignore the landlord. The landlord must
make itself visible at the earliest possible time and throughout the case.
9.
The goal of bankruptcy is to rehabilitate or liquidate a debtor and
apportion its assets to creditors.
8.
A bankruptcy does not necessarily make a bad tenant a good tenant. It
just puts a little more teeth into the remedies a landlord might have to
encourage the tenant to perform the lease properly.
7.
A secured landlord is better off than an unsecured landlord. A
subordinated landlord is still better off than an unsecured landlord.
6.
Bankruptcy is like a multi-ringed circus. What happens in one ring
affects the whole show. The landlord should be visible in as many rings
as possible to be taken seriously.
TOP TEN THINGS TO REMEMBER TO MAKE A
LANDLORD’S LIFE LESS STRESSFUL IN A TENANT
BANKRUPTCY
5.
The automatic stay means exactly what it says. A creditor cannot try to
collect pre-petition debts or interfere with the property of the debtor.
4.
The tenant/debtor’s property includes anything having to do with the
lease. The debtor’s property is also “property of the estate.” It must be
preserved for the benefit of the tenant/debtor and the creditors.
3.
Notwithstanding the automatic stay, the landlord does have remedies as
long as it files appropriate motions and/or the issue is handled through
the attorneys.
2.
A proof of claim will only get a landlord in the front door. There still
must be assets to fund payment of the claim and the landlord must
prove damages.
1.
Try to look at bankruptcy as an opportunity to turn a bad situation into a
better one.
SAFE LEASING: CLAUSES FOR THE
BANKRUPTCY CONSCIOUS
Security Deposits
Lease Guaranties
Letters of Credit
SAFE LEASING: CLAUSES FOR THE
BANKRUPTCY CONSCIOUS
Recapture Provisions:
Assignment and Subletting
Landlord Remedy for an Event of Default
Event of Default/Bankruptcy – Ipso Facto
Clauses
Notice Clauses
Landlord’s Liens
Subordination of Landlord’s Liens
FIVE STEP PROGRAM
How much rent is owed and what is our risk?
What does the lease look like?
How does the lease compare to market?
What information is available to us?
Make a business decision!!!
EVALUATE LEASE
Do we have a Landlord’s lien – statutory or
contractual?
Do we have a letter of credit or guaranty?
Does Tenant own the “fixtures?”
Whose obligation to remove them?
EVALUATE OPTIONS
Tenant is in trouble – what do we do?
Renegotiate Lease?
•
•
•
•
•
Obtain Recapture Clause
Clean up fixture issues
Eliminate notice provisions
Obtain a release
Obtain additional collateral
Letter of credit
Guaranty
TERMINATE LEASE?
Below Market Lease
Worried about assumption and assignment
Not “caught up” in the bankruptcy proceeding
If space is essential, you can get some leverage
FIRST 60 DAYS
First Day Motions
Motion for Approval of DIP financing
Motion to use cash collateral
Motion to extend time to assume or reject lease
Notice from Court
Date filed
Date of Section 341 hearing
Bar Date
341 Creditors Meeting
Short meeting (15 minutes to one hour)
Presiding officer is Trustee
2004 Examination
Meeting may be continued
Tapes are available
PREVENTS ANYONE FROM INTERFERING
WITH DEBTOR’S PROPERTY OR
EFFORTS TO REORGANIZE
Includes:
Commencement or continuation of lawsuit
Enforcement of judgments (monetary or otherwise)
Obtaining possession of property of estate
Collection efforts
Set off of debts
STAY’S EFFECT ON
LANDLORD/TENANT RELATION
You cannot:
Evict tenant
Hinder operation of
business
Lockout tenant
Change locks
Seize tenant’s property
Give eviction notice
Shut off utilities
Terminate lease
Show
property
prospective tenant
to
Apply security deposit
debtor’s
Declare a default
Threaten tenant
Move property of a tenant that
has vacated
STAY’S EFFECT ON
LANDLORD/TENANT RELATION
You Can:
Collect rent and other charges which have accrued
since bankruptcy filing
Draw down letter of credit
Take action to continue a security interest in
property
Take action to remove tenant whose lease has
expired by its own terms prior to or during the
bankruptcy case (this should be done carefully)
ASSUMPTION OF A LEASE
Test is business judgment
Priority claim if rejected after assumption
Three part test
Cure or provide adequate assurance of prompt
cure
Compensate or provide adequate assurance of
compensation for pecuniary loss
Provide adequate assurance of
future
performance
SHOPPING CENTER AMENDMENTS
Must provide adequate assurance of source of rent
and show that financial condition and operating
performance of assignee shall be similar to
financial condition of operating performance of
debtor at time of lease
Percentage rent will not decline substantially
Assumption or assignment is subject to all
provisions in the lease including radius, use,
location and exclusivity and will not breach any
other lease agreement
Not disrupt tenant mix
HOT ISSUE REGARDING
ASSIGNMENT
Designation Rights
IMPORTANT EXCEPTIONS TO
ASSUMPTION AND ASSIGNMENT
Cannot assign:
If applicable law excuses Landlord from
accepting performance from any entity other than
Debtor
If Landlord extended financial accommodation to
Debtor
If lease terminated prior to bankruptcy
WHY FILE A CLAIM?
Only way to get paid
Previous suits, judgments, awards, etc.
Make no difference
LANDLORD CLAIMS
Secured – Extent defined by lease.
Unsecured – Most common
Administrative – Post-petition expense. Highest
priority
Prior to rejection
After rejection
“STUB RENT” Issue
Property Tax / Expenses – Pro-rated
Environmental – Did claim arise pre-petition or postpetition?
THE LANDLORD CLAIM CONTINUUM
Filing
of
Bankruptcy
General Claim vs. Estate
or
Secured Claim Depending
on Lease Language
Assumption: Must cure all
defaults and lease continues
as before
Administrative claim
per rent reserved in
lease until rejection
when claim is
measured by benefit to
the estate
Rejection:
-Constitutes breach of lease from
date of filing.
-General claim or secured claim
depending on lease.
-Claim capped at greater of:
(1)one year's rent or
(2)15% of rent for remaining term of
lease (3 year cap)
CALCULATION OF
“REJECTION DAMAGES”
Calculate whatever damages are for breach under the lease
Cap the damages at equivalent of one year’s rent reserved in lease
Or
Cap the damages at the rent reserved for 15% of the remaining
time under the lease not to exceed three years
i.e., (10 years x 15% = rent for 1.5 years)
(7 years x 15% = rent for 1.05 years)
All amounts are subject to mitigation if new tenant takes possession
CHAPTER 11 PLAN
Disclosure Statement
Voting
Confirmation
Cram Down
SOURCES OF PAYMENT
Post confirmation operations of debtor
Sale of property
Recoveries from lawsuits filed on behalf of
estate
Fraudulent conveyances
Preferences
Turnover suits
Business tort and related suits
EXCEPTIONS TO PREFERENCE
Intended to be a contemporaneous exchange
for new value and was a substantially
contemporaneous exchange
Debt incurred in the ordinary course of
business of the debtor and the transferee, made
in the ordinary course of business and made
according to ordinary business terms
EXCEPTIONS TO PREFERENCE
If a security interest, it:
Secures new value that was given to the debtor to
acquire the property and
Was used to acquire the property and
Was perfected within 20 days after the date the
debtor received the property