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March 23, 2023

Bankruptcy Basics for Retail Landlords

Issue 13—"Store-Closing Sales and Going-Out-of-Business (GOB) Sales"

Retail tenants that have filed Chapter 11 bankruptcy cases will often close unprofitable stores and file motions for Bankruptcy Court authority to conduct store-closing sales—where only select locations are closing—or going-out-of-business (GOB) sales—a theme that should only be used where the full chain is liquidating. They will usually retain a liquidator that specializes in these sales, where the liquidator may act as the tenant’s agent or as a consultant. Bankruptcy Courts routinely authorize GOB sales or store-closing sales, which are often a precursor to lease rejections given the tenant’s desire to cut off liability for future rent, as consistent with the tenant’s maximizing the value of its bankruptcy estate assets. Although many retail leases prohibit or significantly restrict GOB sales, Bankruptcy Courts have held these lease provisions to be unenforceable. However, state and local public health and safety and consumer protection laws will usually still apply. As a consequence, state attorney general offices frequently appear and object or enter into their own form of side letters with the debtor and liquidator to ensure compliance with any applicable safety and consumer protection laws.

Despite the unenforceability in bankruptcy of lease provisions prohibiting GOB sales or store-closing sales, Bankruptcy Courts have the authority to condition the sales to appropriately balance the interests of the tenant and landlord. The landlord needs to maintain the image of the shopping center for the benefit of itself and other tenants (who are prohibited from conducting these sales). The tenant will typically propose certain “sale guidelines” to govern the sales and restrict what can be done and where. These guidelines are often similar in retail cases. However, they are usually insufficient to adequately protect the landlord and its other tenants, and individual centers may have unique issues that warrant specific attention. Hence, the order authorizing the sales should permit the landlord and tenant to enter into separate “side letter” agreements modifying the sale guidelines. It’s important for the order to provide that these agreements have control over any contrary provision of the order.

Topics that are frequently the subject of sale guidelines and side letter agreements include:

  • Maximum duration of sale or outside sale termination date.
  • No usage of terms “Going Out of Business” or “GOB,” “Bankruptcy Sale,” “Chapter 11 Sale,” “Lost Our Lease,” or “Total Liquidation.”
  • Prohibition or restrictions on exterior banners.
  • Limitations on number and location of interior signs—e.g., window and glass-door signage setback requirement.
  • Prohibition of neon signage, and restriction on number of other colors of signage.
  • Prohibition of auctions, balloons, sandwich boards, A-frames, sign walkers, flashing lights, amplified sound, vehicle advertising, items on rooftops, feather flags, signage in common areas, distribution of written materials, or solicitation of customers or advertising at the shopping center outside of the store.
  • Limitation on augmentation of merchandise to be sold with liquidator’s inventory that is of like-kind and quality.
  • Removal of store fixtures, furniture, and equipment through rear entrances or service areas.
  • Hours of operation in accordance with lease.
  • Expedited hearing in Bankruptcy Court if dispute regarding conduct of sale not promptly resolved.

The tenant will often seek authority to conduct GOB sales or store-closing sales on an expedited basis and may do so as part of the tenant’s first-day motions in the bankruptcy case. It’s therefore important to quickly retain experienced counsel to assess the motion and engage counsel for the liquidator, tenant, or both on the terms of a side letter agreement governing the conduct of the sale.

In April, we’ll switch gears and discuss Subchapter V, the relatively new small business aspect of Chapter 11. Be on the lookout for upcoming Bankruptcy Basics issues on this increasingly important feature of the US bankruptcy system.
 

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