Dealing with shopping center leases in Chapter 11 bankruptcies

On Behalf of | Mar 18, 2020 | Chapter 11 Bankruptcy |

When North Carolina businesses are unable to pay their bills or keep up with operating expenses over a long period of time, Chapter 11 bankruptcy may offer them an opportunity for reorganization and a fresh start. While Chapter 11 can provide an important mechanism for businesses to restructure themselves and rid themselves of past obligations, they may need to be mindful of how certain contracts are dealt with. Specifically, retail stores and other consumer-facing businesses with a physical presence may need to negotiate the transfer of their leases with shopping center landlords.

In many cases, businesses going through Chapter 11 bankruptcy may seek to assign their lease to another company, which would take up the responsibility for the payments. However, under the Bankruptcy Code, the new company assigned to the lease should be able to show “adequate assurance of future performance”. Specifically, it should show that it is as able to pay the bills as the company in Chapter 11 was at the time that it signed the lease. Therefore, shopping center owners may be able to reject proposed assignees that may also be vulnerable to bankruptcy moving forward. Shopping center owners receive special protection in the Bankruptcy Code above other commercial property landlords, perhaps because vacant spaces could also drive them towards bankruptcy.

This issue has arisen in several cases, especially when large chain retail businesses are seeking bankruptcy protection and reorganization. Companies like Sears have attempted to transfer their leases to newly created entities emerging from the bankruptcy process but have met resistance from shopping center landlords.

While there may be some hurdles to navigate, the Chapter 11 process can provide significant protection for companies, from small businesses to large entities, that allows them to move forward. A commercial bankruptcy attorney may provide advice on how clients might navigate the process.