TENANT BANKRUPTCY

Presented by

GARY S. KESSLERKESSLER & COLLINS, PC

5950 SHERRY LANE, SUITE 222DALLAS, TX 75225

GOALS

Obtain control of space

Determine amount and type of claim – whether to pursue or seek termination by Debtor

Stay on top of the case and in front of the Debtor

LANDLORD

Creditor Provider of Services after Filing Holder of Unexpired Lease Special Claim Rules Storage Company

10.If the tenant/debtor can, it will ignore the landlord. The landlord must make itself visible at the earliest possible time and throughout the case.

11.The goal of bankruptcy is to rehabilitate or liquidate a debtor and apportion its assets to creditors.

12.A bankruptcy does not necessarily make a bad tenant a good tenant. It just puts a little more teeth into the remedies a landlord might have to encourage the tenant to perform the lease properly.

13.A secured landlord is better off than an unsecured landlord. A subordinated landlord is still better off than an unsecured landlord.

6. Bankruptcy is like a multi-ringed circus. What happens in one ring affects the whole show. The landlord should be visible in as many rings as possible to be taken seriously.

TOP TEN THINGS TO REMEMBER TO MAKE A LANDLORD’S LIFE LESS STRESSFUL IN A

TENANT BANKRUPTCY

5. The automatic stay means exactly what it says. A creditor cannot try to collect pre-petition debts or interfere with the property of the debtor.

6. The tenant/debtor’s property includes anything having to do with the lease. The debtor’s property is also “property of the estate.” It must be preserved for the benefit of the tenant/debtor and the creditors.

7. Notwithstanding the automatic stay, the landlord does have remedies as long as it files appropriate motions and/or the issue is handled through the attorneys.

8. A proof of claim will only get a landlord in the front door. There still must be assets to fund payment of the claim and the landlord must prove damages.

1. Try to look at bankruptcy as an opportunity to turn a bad situation into a better one.

TOP TEN THINGS TO REMEMBER TO MAKE A LANDLORD’S LIFE LESS STRESSFUL IN A

TENANT BANKRUPTCY

SAFE LEASING: CLAUSES FOR THE BANKRUPTCY

CONSCIOUS

Security DepositsLease GuarantiesLetters of Credit

SAFE LEASING: CLAUSES FOR THE BANKRUPTCY

CONSCIOUSRecapture Provisions:

Assignment and SublettingLandlord Remedy for an Event of

DefaultEvent of Default/Bankruptcy – Ipso

Facto ClausesNotice ClausesLandlord’s LiensSubordination of Landlord’s Liens

FIVE STEP PROGRAM

How much rent is owed and what is our risk?

What does the lease look like?How does the lease compare to

market?What information is available to us?Make a business decision!!!

EVALUATE LEASE

Do we have a Landlord’s lien – statutory or contractual?

Do we have a letter of credit or guaranty?

Does Tenant own the “fixtures?”Whose obligation to remove them?

EVALUATE OPTIONSTenant is in trouble – what do we

do?Renegotiate Lease?

• Obtain Recapture Clause• Clean up fixture issues• Eliminate notice provisions• Obtain a release• Obtain additional collateral

Letter of creditGuaranty

TERMINATE LEASE?

Below Market LeaseWorried about assumption and

assignmentNot “caught up” in the bankruptcy

proceeding If space is essential, you can get some

leverage

FIRST 60 DAYSFirst Day MotionsMotion for Approval of DIP financingMotion to use cash collateralMotion to extend time to assume or

reject leaseNotice from Court

Date filedDate of Section 341 hearingBar Date

341 Creditors Meeting

Short meeting (15 minutes to one hour)

Presiding officer is Trustee2004 ExaminationMeeting may be continuedTapes are available

PREVENTS ANYONE FROM INTERFERING WITH DEBTOR’S

PROPERTY OR EFFORTS TO REORGANIZE

Includes:

Commencement or continuation of lawsuit

Enforcement of judgments (monetary or otherwise)

Obtaining possession of property of estate

Collection efforts

Set off of debts

STAY’S EFFECT ON LANDLORD/TENANT RELATION

You cannot:

Evict tenant Lockout tenant Seize tenant’s

property Shut off utilities Show property to

prospective tenant Apply security

deposit

Hinder operation of debtor’s business

Change locks

Give eviction notice

Terminate lease

Declare a default

Threaten tenant

Move property of a tenant that has vacated

STAY’S EFFECT ON LANDLORD/TENANT

RELATIONYou Can:

Collect rent and other charges which have accrued since bankruptcy filing

Draw down letter of credit Take action to continue a security

interest in property Take action to remove tenant whose

lease has expired by its own terms prior to or during the bankruptcy case (this should be done carefully)

ASSUMPTION OF A LEASE

Test is business judgmentPriority claim if rejected after

assumptionThree part test

Cure or provide adequate assurance of prompt cure

Compensate or provide adequate assurance of compensation for pecuniary loss

Provide adequate assurance of future performance

SHOPPING CENTER AMENDMENTS Must provide adequate assurance of source

of rent and show that financial condition and operating performance of assignee shall be similar to financial condition of operating performance of debtor at time of lease

Percentage rent will not decline substantially

Assumption or assignment is subject to all provisions in the lease including radius, use, location and exclusivity and will not breach any other lease agreement

Not disrupt tenant mix

HOT ISSUE REGARDING ASSIGNMENT

Designation Rights

IMPORTANT EXCEPTIONS TO ASSUMPTION AND

ASSIGNMENTCannot assign:

If applicable law excuses Landlord from accepting performance from any entity other than Debtor

If Landlord extended financial accommodation to Debtor

If lease terminated prior to bankruptcy

WHY FILE A CLAIM?

Only way to get paidPrevious suits, judgments,

awards, etc. Make no difference

LANDLORD CLAIMS Secured – Extent defined by lease. Unsecured – Most common Administrative – Post-petition expense.

Highest priority Prior to rejection After rejection

“STUB RENT” Issue Property Tax / Expenses – Pro-rated Environmental – Did claim arise pre-

petition or post-petition?

THE LANDLORD CLAIM CONTINUUM

General Claim vs. Estateor

Secured Claim Dependingon Lease Language

Filingof

Bankruptcy

Administrative claim per rent reserved in lease until rejection

when claim is measured by benefit to

the estate

Assumption: Must cure all defaults and lease continues as before

Rejection: -Constitutes breach of lease from date of filing.-General claim or secured claim depending on lease.-Claim capped at greater of:(1)one year's rent or(2)15% of rent for remaining term of lease (3 year cap)

CALCULATION OF “REJECTION DAMAGES”

Calculate whatever damages are for breach under the lease

Cap the damages at equivalent of one year’s rent reserved in lease

Or

Cap the damages at the rent reserved for 15% of the remaining time under the lease not to exceed three years

i.e., (10 years x 15% = rent for 1.5 years)

(7 years x 15% = rent for 1.05 years)

All amounts are subject to mitigation if new tenant takes possession

CHAPTER 11 PLAN

Disclosure StatementVotingConfirmationCram Down

SOURCES OF PAYMENTPost confirmation operations of

debtorSale of propertyRecoveries from lawsuits filed on

behalf of estateFraudulent conveyancesPreferencesTurnover suitsBusiness tort and related suits

EXCEPTIONS TO PREFERENCE

Intended to be a contemporaneous exchange for new value and was a substantially contemporaneous exchange

Debt incurred in the ordinary course of business of the debtor and the transferee, made in the ordinary course of business and made according to ordinary business terms

EXCEPTIONS TO PREFERENCE

If a security interest, it:Secures new value that was given to

the debtor to acquire the property and

Was used to acquire the property and

Was perfected within 20 days after the date the debtor received the property