Chapter 11: Real Estate Leases

Web posted and Copyright © 1/12/98, American Bankruptcy Institute.

The following abstract summarizes the text of submissions made to the National Bankruptcy Review Commission. The abstract is organized by NBRC working group and topic.

The Final Report of the NBRC can be viewed on-line. To obtain a copy of any document shown below, contact the Center for Legislative Archives, Room 205, National Archives Building, Washington, D.C. 20408. The telephone number is 202/501-5350. Mr. R. Michael McReynolds, Deputy Director, will be able to assist with specific inquiries. (The NBRC documents will be housed at this location until June, 1999. Thereafter, the records will be transferred to the Center's archives in College Park, MD.)
 

ID Name Group Other Code
Sec
Cross
Ref
Problem Referenced Proposed Solutions
NBRC-0001 "Shopping Centers Today"

365 502(b)(6) 1. Abuse of rejection provisions; 2. Retention of poor mgmt.; 3. Lenient insolvency test 1. Absolute limit on time to assume or reject leases; 2. Restrict employment & compensation of senior management in bankruptcy; 3. Permit Shopping Center landlords to serve on creditors' committee prior to filing proof of claim
NBRC-0001 "Shopping Centers Today"

365 502(b)(6) 1. Abuse of rejection provisions; 2. Retention of poor mgmt.; 3. Lenient insolvency test 1. Absolute limit on time to assume or reject leases; 2. Restrict employment & compensation of senior management in bankruptcy; 3. Permit Shopping Center landlords to serve on creditors' committee prior to filing proof of claim
NBRC-0155 Burton F. Dahlberg President; Kraus-Anderson, Inc. Letter from Sen. Rod Grams, dated 11/1/96, asking Commission to respond. 365 502(b)(6) Chapter 11 is being used as a real estate strategy by tenants who wish to reject unprofitable leases. Every prospective tenant is looked at with a jaundiced eye. One developer asks, how would tenants feel if developers went bankrupt to disavow a below market lease Modification of bankruptcy laws will be positive to both developers and retailers.
NBRC-0198 James E. Covington, Jr. The Covington Company
365
Author is responding to an article by Commissioner Butler that was published in the Insight Newsletter. The author represents a company who develops property for retailers on long-term leases. He comments on problems arising out of the affirmation or rejection of executory contracts and unexpired leases. The Bankruptcy Code provides that the debtor must affirm or reject leases and executory contracts within 90 days of filling. Porblems arise, however, not with the Code but with bankruptcy judges who frequently extend the right of lease ratification or termination until the approval date of the reorganization plan. This extension may seem logical, especially in cases where the tenant has several hundred stores which require a good deal of time to analyze. As a practical matter, however, the retail debtor's "point of sale" computer terminals provide immediate information on each store's profitability, and the debtor is well aware at the time of filing the number of unprofitable stores that it intends to close. The debtor merely uses the Code to "extract the debtor from losing locations." The landlord on the other hand loses complete control over its property. In effect, the tenant has a tenancy at will, and the landlord must be ready to receive the lease premises at any time. Granted, the tenant must pay rent and other costs while it remains in occupancy, but it has the benefit of a rent which is based upon long-term commitment and not a day-to-day operation. During this period, some courts even permit tenants to exercise options when they have not affirmed the lease. Bankruptcy Code should be amended to provide an outside time limit for the affirmation or rejection of real estate leases which, except under extraordinary circumstances, cannot be extended by the bankruptcy judge. Futhermore, as most tenants are aware at the time of filing of the profitiability of each of their stores, less time is needed to analyze the business, and the the period of reorganization should be shortened.
NBRC-0198 James E. Covington, Jr. The Covington Company
365 502(b)(6) Author is responding to an article by Commissioner Butler that was published in the Insight Newsletter. The author represents a company who develops property for retailers on long-term leases. He argues that tenant-debtors who disavow their leases should have to continue paying rent for a period long enough to allow the landlord to find a new tenant. Currently, real estate leases are treated as pre-petition obligations, and are transfered to the unsecrued claim pool when the tenant-debtor files for bankruptcy. A tenant-debtor who chooses to disavow its lease and abandon the premises has no obligation to pay rent beyond the date of termination. All the landlord retains is an unsecured claim with a cap. In these cases, the landlord must either have very deep pockets or be able to quickly release the property before the lender forecloses. Bankruptcy Code should be amended to provide that, in cases where a tenant-debtor terminates a lease with eight or more years remaining: 1) All pre-petition rental obligations must be paid at the time of termination; and 2) Rental payments must be made for a period of four to six months after the premises have been vacated or abandoned in order to allow the landlord "room to maneuver prior to the foreclosure axe falling." Both of these expenditures should be considered administrative expenses.
NBRC-0198 James E. Covington, Jr. The Covington Company
365
Author is responding to an article by Commissioner Butler that was published in the Insight Newsletter. The author represents a company who develops property for retailers on long-term leases. He states that, when considering amendments to the Bankruptcy Code, the NBRC should keep in mind that retail tenant debtors often have several hundred stores or more, and will marshal all of their efforts when litigating a case brought by a landlord because the case could effect all of the tenant debtors' leases. In comparison, the landlord is often faced with the difficult and costly task of litigating a case that only affects one or two stores. In effect, the landlord is forced to bear a much greater burden proportionate to outcome than the tenant debtor. Same.
NBRC-0228 Vicent P. Zurzolo Bankruptcy Judge (C.D. Cal.) Article in "Bankruptcy Court Decisions" about a survey conducted by members of the American Bankruptcy Institute 506(d)
"Does the rejection of a lease pursuant to 11 U.S.C. § 365 constitute a termination of the lease and all obligations and benefits that go with it" None provided.
NBRC-0389 Burton F. Dahlberg President, Kraus-Anderson, Inc. Cover letter from Sen. Rod Grams enclosing this submission

The author attaches an article from the 10/21/96 "Shopping Center Today" that reports "Deal makers decry 'abuses' of retail Chapter 11 filings." The article states that shoppoing center developers and owners have been unfairly impacted by tenants who use chapter 11 filings as a "real estate strategy" and normal business practice, as opposed to a last resort. The author requests the NBRC's "collective efforts to correct this inequitable situation" and prevent tenants from using chapter 11 as a real estate strategy.
NBRC-0475 Vincent P. Zurzolo United States Bankruptcy Judge, Central District of California
365
Author poses question: "Does the rejection of a lease pursuant to 11 U.S.C. Section 365 constitute a termination of the lease and all obligations and benefits that go with it Author hopes that the Commission will address this issue.