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September 22, 2022

Bankruptcy Basics for Retail Landlords

Issue 1—"First Day Motions: Part 1"

Your tenant has filed for bankruptcy protection and you may not have received any notice of the filing. It’s critical to assess your exposure to this tenant right away, including how many locations are impacted, the status of the leases, and the goals for each. These considerations will drive many of your decisions throughout the bankruptcy case and are important to communicate to your legal counsel up front. 

On the same day they file their bankruptcy case, many debtors file “first-day motions” requesting immediate relief from the bankruptcy court that could violate your rights. Although final hearings on these motions will usually be scheduled at which landlords can raise their concerns, these hearings may not occur until weeks later (or at all) and it could be too late.

Lease Rejection Motions

Tenants often file motions to reject real property leases they no longer wish to keep to prevent the accrual of post-bankruptcy rent. Landlords should ensure that rejection of their leases does not occur until they have full dominion and control of the premises through receipt of keys, key codes, and security codes, with any tenant property deemed abandoned and the landlord free to retain or dispose of it without liability. Ideally, the tenant should also be required to remove any hazardous materials and personally identifiable information (PII) from the premises prior to rejection. Lease rejection motions are decided at one hearing, as early as the first day of the case, with no opportunity for a subsequent final hearing. Future issues of Bankruptcy Basics will offer more details and an explanation of how a lease rejection claim is calculated.

Store Closing and Going-out-of-Business Sale Motions

Motions for authority to conduct store closing and/or going-out-of-business (GOB) sales are routinely granted by bankruptcy courts despite lease provisions that prohibit them. Landlords should seek to impose conditions on the conduct of the sales to protect their shopping centers (and other tenants). Unrestricted sales may include signage and advertising that could damage the premises, both in a physical sense and the image and reputation of the center. The tenant and its liquidator will usually propose guidelines for the conduct of these sales, but they’re typically insufficient. Landlords should quickly negotiate modifications to the guidelines in separate letter agreements. While only interim relief is typically sought as a first-day motion, sales will likely commence immediately (or they might have already), which makes it too late to wait for the final hearing.

First-Day Motions: Part 2” details DIP financing/cash collateral motions and highlights certain other motions that may be filed at the outset of a retail bankruptcy case.

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