Landlords often believe that once their tenant files for bankruptcy, there is little that can be done to recover from the tenant. While it is entirely possible that a tenant’s bankruptcy filing could result in a goose egg, active monitoring of the bankruptcy case will maximize recoveries. Below are a few key strategies:
- Monitor your tenant’s financial health prior to a bankruptcy filing
A landlord must take advantage of today’s tools to monitor their tenants’ financial well-being. Create automatic google searches so that you are notified daily of any mention of the tenant on the internet. Has a tenant announced store closings? Has the tenant begun negotiations with its lenders? Have the tenant’s earnings disappointed investors? These are key indications of a potential bankruptcy filing. A lender can better prepare for its tenant’s bankruptcy filing with as much advance notice as possible.
- Has the tenant filed a store closing list?
Typically, bankrupt tenants with a national footprint file a store closing list early in their bankruptcy case. There are three ways to obtain the store closing list. First, hire an attorney to monitor the case and routinely review the docket. Second, register for a PACER account to monitor the tenant’s bankruptcy filings. The service is free except for a per-page cost to review documents. Third, await notice of the store closing list from the tenant. Bankruptcy documents are not always self-explanatory. An attorney can quickly determine whether any document filed in the case impacts the landlord and can advise of critical deadlines.
- Administrative claims for post-bankruptcy rent
A tenant is required to pay a landlord rent for the period of time the tenant occupies the space post-bankruptcy filing. The landlord’s claim to rent post-bankruptcy is classified as an administrative claim. Administrative claims are claims held by landlords, the tenant’s professionals and others who assist in the administration of the tenant’s bankruptcy case. Administrative claims are important because they are paid ahead of unsecured claims.
Let’s assume that rent is due on the first of the month, but the tenant files a bankruptcy case on the fourth of the month. Bankruptcy courts often allow the landlord to claim the rent owed from the fourth of the month to the end of the month (called “stub rent”) as an administrative claim, while rent due from the first to the third of the month would qualify only as an unsecured claim.
The landlord may claim all amounts due and owed under the lease for the post-bankruptcy period as an administrative claim, including rent, common area maintenance, insurance and taxes as provided in the lease. In one instance, a client provided a tax reconciliation to the tenant after the tenant commenced a bankruptcy case. Pursuant to the lease, the tenant was then obligated to pay the client the reconciled tax amount. A landlord should endeavor to characterize as much of its claim against the tenant as an administrative claim as allowable under the bankruptcy code.
- Deadlines, deadlines, deadlines…
Landlords must abide by all relevant deadlines in a bankruptcy case to maximize their chances of a meaningful recovery. The most important deadline regards the proof of claim. Typically, landlords will have the later of the court-imposed proof of claim deadline or 30 days after a lease is rejected (i.e., the tenant vacates the space per court order) to file a proof of claim. On the proof of claim, it is critical that the landlord identify (1) any rent owed prior to the bankruptcy filing (the “pre-petition rent”); (2) rent owed subsequent to the bankruptcy filing (the “post-petition rent”), which is entitled to administrative claim status; and (3) future rent owed under the lease (“rejection damages”), which is capped by the bankruptcy code at the greater of one lease year or 15 percent, not to exceed three years, of the remaining lease term. It is critical that the proof of claim contain each of these three components.
There is a myriad of other deadlines that must be observed, and only through routine monitoring of the bankruptcy docket can one be assured of satisfying all the deadlines. For instance, if a tenant determines to remain in the space post-bankruptcy, the tenant assumes the lease and must pay to the landlord all defaulted amounts. This is known as a “cure claim.” The tenant will typically publish the cure claim, and the landlord typically possesses only a few days to object to the cure amount if incorrect. The landlord is obligated to accept the cure amount if it fails to object. There have been cases where the cure amount was incorrect by tens of thousands of dollars. There are also instances where the court will establish a separate administrative claims bar date when the landlord will be required to file a claim for post-bankruptcy rent owed or be foreclosed out from receiving any post-bankruptcy rent. In short, it is critical to monitor and comply with all court-imposed deadlines.
- Negotiating the lease post-bankruptcy
Clients often inquire whether the landlord may negotiate the lease with the tenant post-bankruptcy. The answer is yes. Typically, the tenant will approach the landlord with a proposal to reduce the rent or shorten the lease term. The landlord is free to accept, reject or counter such proposals. Often, the tenant will indicate that if the landlord does not accept the proposal, the tenant will reject the lease. As in any lease negotiation, the landlord is free to make the most appropriate business decision that suits its unique needs for the space.
Matthew Kramer is a partner at Weinberg, Wheeler, Hudgins, Gunn & Dial, where for more than 15 years he has focused on corporate and real estate workouts.