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September 22, 2022

Bankruptcy Basics for Retail Landlords

Bankruptcy Basics for Retail Landlords—"First Day Motions: Part 2"

"First-Day Motions: Part 1" covered immediate steps to take when your tenant files for bankruptcy and certain “first-day motions,” which tenants often file on the same day they commence their bankruptcy case. This issue offers insight into one other frequently filed first-day motion and introduces a few others.

Debtor-in-Possession Financing/Cash Collateral Motions

Many tenants in bankruptcy seek debtor-in-possession (DIP) financing for their ongoing operations and authority to use their lender’s “cash collateral.” The lender will often require a lien on all of the tenant’s assets—including real property leases—and permission to enforce that lien upon any default by the tenant. However, real property leases often prohibit the tenant from granting any lien against their interest in the lease and liens against leases may also violate the landlord’s own loan agreements. Liens should therefore be limited to any proceeds of the disposition of leases rather than the leases themselves. Lenders also usually want the ability to enter leased premises and conduct store closing and going-out-of-business sales following a default, but this should be limited to when there’s landlord consent or as authorized by applicable law or further court order.

Other First Day Motions

Largely depending on whether the tenant’s bankruptcy case has a clear direction at the outset, they may file other motions on or around the first day of the case, including approval of: 

  • Sale and bidding procedures, which seek to establish a process by which the company may be sold and which sometimes include a “stalking horse” (lead) bidder
  • A restructuring support agreement, plan and disclosure statement, or both, usually to implement a pre-negotiated reorganization 
  • Lease rejection, assumption/assignment procedures, or both, which set up a process to facilitate the tenant’s lease decisions

Each of these will be covered in more detail in later issues of Bankruptcy Basics.

The next issue of Bankruptcy Basics will cover the automatic stay, a foundational concept of the United States Bankruptcy Code, which prevents creditors from collecting or pursuing certain debts from their tenants once they become a debtor in bankruptcy. The penalties for violating the automatic stay can be harsh, even if you don’t do so purposefully; be on the lookout for Issue 2 of Bankruptcy Basics for Retail Landlords—coming soon.

For more information about first-day motions generally, look for an upcoming alert from Barclay Damon’s Restructuring, Bankruptcy & Creditors’ Rights Practice Area.

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