{"id":1004127482,"date":"2015-09-16T10:17:49","date_gmt":"2015-09-16T18:17:49","guid":{"rendered":"https:\/\/www.commercialsearch.com\/news\/?p=1004127482"},"modified":"2022-12-03T14:41:42","modified_gmt":"2022-12-03T22:41:42","slug":"dont-lose-your-shirt","status":"publish","type":"post","link":"https:\/\/www.commercialsearch.com\/news\/dont-lose-your-shirt\/","title":{"rendered":"When Good Tenants Go Bad"},"content":{"rendered":"<p><em>By\u00a0Jay Maddox, Principal, Avison Young<\/em><\/p>\n<p>Several recent high profile retailer bankruptcies \u2013 Radio Shack, Haggen Stores, and Quicksilver \u2013 to name just a few \u2013 shine a light on a very difficult problem for commercial property owners. This problem is exacerbated for single-tenant net-leased investments (STNL) that rely exclusively on the income from one tenant and have become a virtual safe-haven for many investors, especially 1031 exchanges.<a href=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2014\/11\/James-Maddox.jpg\"><img loading=\"lazy\" decoding=\"async\" data-attachment-id=\"1004107852\" data-permalink=\"https:\/\/www.commercialsearch.com\/news\/is-re-crowdfunding-ready-for-prime-time\/james-maddox\/\" data-orig-file=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2014\/11\/James-Maddox-e1453236200360.jpg\" data-orig-size=\"390,336\" data-comments-opened=\"1\" data-image-meta=\"{&quot;aperture&quot;:&quot;4.5&quot;,&quot;credit&quot;:&quot;Kareem Assassa&quot;,&quot;camera&quot;:&quot;NIKON D700&quot;,&quot;caption&quot;:&quot;&quot;,&quot;created_timestamp&quot;:&quot;1409748542&quot;,&quot;copyright&quot;:&quot;The Beverly Hills Photographer Inc. 2012&quot;,&quot;focal_length&quot;:&quot;70&quot;,&quot;iso&quot;:&quot;400&quot;,&quot;shutter_speed&quot;:&quot;0.00625&quot;,&quot;title&quot;:&quot;&quot;}\" data-image-title=\"James Maddox\" data-image-description=\"\" data-image-caption=\"\" data-large-file=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2014\/11\/James-Maddox-e1453236200360.jpg?w=390\" class=\"alignright size-thumbnail wp-image-1004107852\" src=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2014\/11\/James-Maddox.jpg\" alt=\"James Maddox\" width=\"150\" height=\"150\" \/><\/a><\/p>\n<p>So, what is an owner to do when his formerly blue chip tenant files for Chapter 11?\u00a0 To be sure, there are no easy answers, but it helps to have a basic understanding of available rights and remedies. Bankruptcy provides some protection for property owners, but overall these protections fall short of the actual remedies generally available under the lease.<\/p>\n<p><strong><em>The Murky World of Bankruptcy<\/em><\/strong><\/p>\n<p>Bankruptcy is a complex world filled with arcane, confusing terms and governed by a complex court process. Ultimately, it is litigation, and it is a forum for debtors to work out a recovery plan. A bankruptcy filing provides the debtor immediate breathing room from creditors\u2019 claims including law suits and past due rent. And to add to the misery for owners, the bankruptcy provisions common to most leases, which allow the landlord to evict a bankrupt tenant, are unenforceable.<\/p>\n<p>Under the Bankruptcy Code, commercial property leases are deemed \u201cexecutory contracts\u201d that must either be \u201cassumed\u201d or \u201crejected\u201d by the bankrupt tenant. The tenant has as much as 210 days to decide whether to accept or reject the lease. \u00a0In a large retailer bankruptcy involving hundreds of stores, the decision to keep or close certain stores is typically part of a larger negotiation with creditors. The good news for landlords is that during the intervening time period the tenant must pay rent and fulfill its lease obligations. The bad news is that the landlord is in limbo until the lease is either assumed or rejected, and the tenant does not have to pay past due amounts incurred before the bankruptcy filing. Worse, unlike a mortgage lender, the property owner faces the prospect of becoming a general unsecured creditor if the lease is rejected.\u00a0 Given the risk and potential delay, landlords occasionally attempt to force the tenant\u2019s hand by filing a court motion to compel a decision.<\/p>\n<p><strong><em>Assumption or Rejection of the Lease <\/em><\/strong><\/p>\n<p>If the lease is assumed, the bankrupt tenant must cure all defaults including past due payments. If there is a subsequent default, the landlord\u2019s claim gets paid in full ahead of all other unsecured creditors. This sounds like a good result; however, there is a flip side.\u00a0 Once the lease is assumed, the tenant has the right to sell or assign it to a third party \u2013 even if the lease prohibits it \u2013 without the landlord\u2019s approval.\u00a0 Consequently, the owner may be stuck with a below-market deal or an unwanted tenant.<\/p>\n<p>If the lease is rejected, the tenant must immediately surrender the premises to the owner, who is then free to seek a new tenant. The owner will have a general, unsecured claim in the bankruptcy for unpaid rent and other amounts due under the lease. In addition, the owner can be compensated for future rent; however, in a bankruptcy, the owner\u2019s claim for future rent is capped by a formula, regardless of what the lease says.<\/p>\n<p><strong><em>A Word About Unsecured Claims and Creditor Committees <\/em><\/strong><\/p>\n<p>The owner whose lease is rejected must file a \u201cproof of claim\u201d by the court-ordered deadline. Failure to do so may result in no damages recovery. The owner then becomes a general unsecured creditor, together with other unsecured creditors such as unpaid vendors. Unfortunately, unsecured creditors sometimes collect only a fraction of their claims.<\/p>\n<p>For that reason, in most large retailer bankruptcies, the unsecured creditors form a committee comprised of representatives of the largest creditors. A landlord with a large claim may elect to serve on the committee. The committee then hires legal counsel and other professionals to help protect its interests.<\/p>\n<p>Because many important issues must be addressed early in the bankruptcy case, creditor committees are typically formed quickly. This places landlords at a potential disadvantage because their status as creditors may be unknown. For this reason, owners may want to hire professionals and\/or take other actions to represent their interests.<\/p>\n<p>Bankruptcy is a murky road, fraught with peril, where an unwitting investor can easily lose his shirt. In any case, an owner would be wise to seek advice from bankruptcy and real estate experts if a tenant bankruptcy occurs or is imminent.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>By Jay Maddox, Principal, Avison Young: What is an owner to do when his formerly blue-chip tenant files for Chapter 11?  <\/p>\n","protected":false},"author":952,"featured_media":1004507516,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[37301],"tags":[],"class_list":["post-1004127482","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v28.0 (Yoast SEO v28.0) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>When Good Tenants Go Bad - Commercial Property Executive<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.commercialsearch.com\/news\/dont-lose-your-shirt\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"When Good Tenants Go Bad\" \/>\n<meta property=\"og:description\" content=\"By Jay Maddox, Principal, Avison Young: What is an owner to do when his formerly blue-chip tenant files for Chapter 11?\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.commercialsearch.com\/news\/dont-lose-your-shirt\/\" \/>\n<meta property=\"og:site_name\" content=\"Commercial Property Executive\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/CPExecutive\" \/>\n<meta property=\"article:published_time\" content=\"2015-09-16T18:17:49+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-12-03T22:41:42+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2021\/03\/James-Maddox.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"390\" \/>\n\t<meta property=\"og:image:height\" content=\"336\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Anna Spiewak\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@cpexecutive\" \/>\n<meta name=\"twitter:site\" content=\"@cpexecutive\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/www.commercialsearch.com\\\/news\\\/dont-lose-your-shirt\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/www.commercialsearch.com\\\/news\\\/dont-lose-your-shirt\\\/\"},\"author\":{\"name\":\"Anna Spiewak\",\"@id\":\"https:\\\/\\\/www.commercialsearch.com\\\/news\\\/#\\\/schema\\\/person\\\/1bbb99675c2609ea2e6792f8b25d7b76\"},\"headline\":\"When Good Tenants Go Bad\",\"datePublished\":\"2015-09-16T18:17:49+00:00\",\"dateModified\":\"2022-12-03T22:41:42+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/www.commercialsearch.com\\\/news\\\/dont-lose-your-shirt\\\/\"},\"wordCount\":756,\"commentCount\":0,\"image\":{\"@id\":\"https:\\\/\\\/www.commercialsearch.com\\\/news\\\/dont-lose-your-shirt\\\/#primaryimage\"},\"thumbnailUrl\":\"https:\\\/\\\/www.commercialsearch.com\\\/news\\\/wp-content\\\/uploads\\\/sites\\\/46\\\/2021\\\/03\\\/James-Maddox.jpg\",\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\\\/\\\/www.commercialsearch.com\\\/news\\\/dont-lose-your-shirt\\\/#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/www.commercialsearch.com\\\/news\\\/dont-lose-your-shirt\\\/\",\"url\":\"https:\\\/\\\/www.commercialsearch.com\\\/news\\\/dont-lose-your-shirt\\\/\",\"name\":\"When Good Tenants Go Bad - 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