tenant bankruptcy presented by gary s. kessler kessler & collins, pc 5950 sherry lane, suite 222...
TRANSCRIPT
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