The last issue of Bankruptcy Basics went through a debtor-tenant’s options for the disposition of their leases in a retail bankruptcy case. This issue will cover the timing constraints under the Bankruptcy Code that govern lease decision timing along with other considerations that often have an even greater impact.
Time to Assume or Reject Retail Store Leases Under the Bankruptcy Code
From 2005 through December 2020, debtors had an initial period of 120 days from the filing of the bankruptcy case—or entry of a plan confirmation order, if earlier—to assume or reject their unexpired leases of nonresidential real property (i.e., retail store leases) under Bankruptcy Code Section 365(d)(4). One 90-day extension could be sought for “cause” (which is fairly easily satisfied in most cases), and if approved by the bankruptcy court, the total time period to make lease decisions would be 210 days from the petition date.
In December 2020, Congress amended various Bankruptcy Code provisions in the midst of retail store restrictions and closures. One change was to increase the initial period for debtors to assume or reject leases to 210 days from the petition date (again, subject to the earlier confirmation of a plan). The single, 90-day extension for “cause” remained available, which could take the potential deadline to 300 days from the petition date. While this provided retailers in Chapter 11 with additional breathing room during a very uncertain time, in-person retail operations have since stabilized. As a result, the amendment contemplating the current 210-day initial lease decision period is expected to sunset as scheduled on December 27, 2022, which would return the initial period to 120 days.
Can the Time for Lease Decisions Be Modified?
If a retailer is approaching its final deadline to assume or reject its store leases, it will often seek consent from landlords to extend the deadline. While landlords are under no obligation to consent, they often agree to continue lease negotiations in an attempt to avoid the debtor rejecting leases prior to the deadline. The landlord can request concessions in exchange for stipulating to a further extension, such as the payment of attorneys’ fees incurred in connection with the extension and even a waiver of any causes of action for preferential transfers made before the bankruptcy filing and other “avoidance” action claims. The landlord should also insist that the debtor pay any outstanding post-petition rent.
There are also times when a landlord wants the debtor’s decision to come quicker than the existing deadline. Landlords may file a motion to compel the debtor to assume or reject a lease within a certain expedited timeframe. This relief—along with other remedies a landlord can seek against tenants in Chapter 11—will be covered in a future Bankruptcy Basics issue.
What Happens If No Lease Decision Is Made by the Deadline?
If the debtor does not assume or reject a retail store lease by the applicable deadline, the lease is deemed rejected and the debtor must immediately surrender the premises to the landlord.
Practical Considerations for Timing of Retail Store Lease Decisions
While the Bankruptcy Code provides the statutory framework, certain practical considerations often have a greater role in dictating when lease decisions are made. Retail debtors commonly rely on their pre-bankruptcy financing sources as debtor-in-possession (post-bankruptcy) lenders (DIP lenders), which allows the DIP lenders to take some control of the direction and timing of the case. DIP lenders’ control frequently takes the form of DIP milestones—deadlines set by the DIP lenders, which, if not met, constitute defaults. These types of deadlines tend to dictate the timing of a retailer’s lease decisions above all else.
Another important consideration is the requirement that debtors timely perform their lease obligations during the bankruptcy case—more on that in the next issue of Bankruptcy Basics for Retail Landlords—so there is a built-in incentive for a debtor to be decisive.
There are many factors that affect a retail debtor’s lease decision timing, and it’s important for landlords to consider their goals for the leased premises and the facts and circumstances of each lease in each case when assessing their approach.