Trending Commercial Real Estate Legal Issues

Considering Landlord Rights in Commercial Tenant Bankruptcies


Commercial landlords have become familiar with the phrase “retail apocalypse,” a sobering term that refers to the recent epidemic of retail store closings. It is a trend that has resulted from companies filing for bankruptcy, and one that does not appear to be slowing. The Bankruptcy Code contains three key provisions landlords must understand as they navigate this dynamic landscape.

Immediately after a tenant files for bankruptcy, an automatic stay is invoked to protect the tenant from collection activities. This action prevents landlords from initiating an eviction, changing the locks or demanding payment of past-due rent. While it is possible to file a motion to seek relief from an automatic stay, landlords must be aware that the injunction still applies, even if the terms of the lease state the contract is terminated upon the filing of a bankruptcy case.

Under Section 365 of the Bankruptcy Code, a tenant who files for bankruptcy may reject or assume the remainder of the lease. Often, the tenant will reject the lease for economic reasons. The landlord then becomes an unsecured creditor with a claim for damages. As such, however, they will likely receive less than the actual amount of the damages claimed. Fortunately, the tenant is still liable to the landlord for rental payments that became due after the petition was filed and before the lease was rejected. It is clearly preferable to the landlord that the tenant assumes the lease, the premises remain occupied, and the tenant agrees to be bound by the terms of the lease going forward.

Finally, a proof of claim can be filed by a landlord if they are owed damages by a tenant. The landlord may not know the amount of damages to claim if the client has not yet decided to reject or assume the lease, so they are provided time to assert damages if the tenant rejects the lease. Landlords should be aware of these dates to ensure they file a proof of claim in a timely fashion.

Restaurant Leases
While restaurants have shown resilience to certain aspects of retail ills, they can present problems for landlords who desire to keep traditional retail tenants happy. Odors, parking, noise and beer and wine service at restaurants present unique problems.

To address the issue of odors and smoke coming out of hood exhaust pipes, scrubbers are and should be required, especially if there are residential components to the center. There is the potential for a very negative impact on leasing to residential tenants who experience smoke and odors penetrating their apartments adjoining restaurants. The cost of such installations may be a challenge to both landlords and tenants.

Grease traps are a must in restaurant operations, and have been for a long time. There may be a desire by landlords for a multi-tenant grease trap installation. That’s so the landlord can be assured of the regularity of cleaning and maintenance that are required to ensure efficient operation of the grease traps. On the other hand, dividing up the costs of maintenance and replacement of the multi-tenant traps can be a headache since each tenant’s use and demand on the system can vary widely.

Outdoor patio and seating areas are extremely common today. However, they bring with them issues of liability, adequate insurance, controlled entrances, noise and rent charges, if any. All must be taken into account in lease negotiations.

Finally, issues relating to the serving of beer, wine and spirits seem to never end. There are licensing matters, whether landlord or tenant control will ultimately control the liquor permit, and unique insurance products that must be accounted for.

Conservation Easements
Recent case law continues to show IRS pressure on the use of conservation easements as qualified charitable contributions. In one example, a conservation easement was donated which reserved to the landowner, if an eminent domain taking occurred, the value of any post-easement improvements built by the landowner. The IRS attacked this provision successfully (appeal expected), convincing the appeals court that this was an impermissible retention by the landowner of a right to “extinguishment proceeds” by the landowner. The deduction was completely disallowed.

In another example, the court held that a golf course easement, which was syndicated, did not protect any of the required conservation purposes. The charitable deduction was completely disallowed.

In the third example, also a syndicated easement transaction, the charitable deduction was completely disallowed because the Form 8283 required to be filed by the IRS in such transactions was not completed properly in that a blank space was intentionally left open (apparently on the advice of counsel).

Conclusion
Put your experienced, professional team in place in advance of dealing with the issues discussed above. You will avoid surprises after the documents have been signed!

John (Jack) Waldeck, Jr. is head of the Real Estate team at Walter | Haverfield. Jack can be reached at jwaldeck@walterhav.com or at 216-928-2914.