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Bankruptcy Reform

When President Bush signed into law bankruptcy reform legislation, retail real estate gained leverage to evict bankrupt tenants. The bill, which was passed by the Senate in March and the House in April, prohibits solvent companies from filing for Chapter 11 bankruptcy protection to evade lease obligations and dispose of unprofitable space.

“Such abuses put an unnecessary financial burden on our economic system and represent a hidden tax on property owners,” says Real Estate Roundtable Senior Vice President Clifton Rodgers Jr. “This legislation is long-overdue.”

The real estate industry has been pushing for bankruptcy code reform for the past eight years. While versions of the bill were approved by the House several times, the proposed legislation was supported by the Senate only once, in 2000, but President Clinton vetoed the measure. This time, the Senate passed the bill by a vote of 74-25.

“The composition of Congress is different today, leaning more toward business,” says Chuck Achilles, vice president of legislative affairs and research for the Institute of Real Estate Managers. “The past election changed some seats and there's been a recognition by the Democrats to be more attentive.”

While, theoretically, the old law gave tenants seeking bankruptcy protection under Chapter 11 60 days to notify landlords of their plans for the space, that deadline is rarely enforced and retailers have been known to stretch out their decision for years. Bankruptcy courts have often granted repeated extensions. The new law sets an absolute limit of 210 days. Retailers are still supposed to make a decision within 60 to 120 days, but the courts can only grant one extension of 90 days. “It's certainly important if you're a shopping center owner that has a large anchor that's in trouble,” Achilles says. “For the viability of existing tenants, it's important that decisions are made quickly.”

The new language also levels the playing field between big and small shopping center owners filing for bankruptcy protection. The previous rule gave owners of property valued below $4 million longer to resolve their bankruptcy situations. The 90-day rule is for owners of all size properties.

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