Bankruptcies Spark Debate over Lease Consideration Deadlines

The current wave of bankruptcies, especially among retailers, has created one of today’s biggest headaches for single-tenant landlords. As Congress considers modifying elements of a four-year-old bankruptcy law, debate is heating up over whether to extend the 210-day period tenants can take to assume or reject existing lease terms. The demise of Circuit City, which shuttered the last of its remaining 567 stores earlier this month, has helped bring the issue to a head. In a move that could have far-reaching implications for troubled net lease tenants and their landlords, Rep. Jerrold Nadler, a New York Democrat, is proposing legislation that would ease the time limit.In a letter to a House Judiciary subcommittee last week, the chief lawyer for the National Retail Federation told lawmakers that the limit forces many stores to close sooner than they would otherwise. “As now written, the law limits the bankruptcy court’s discretion to the point that it has become more difficult for retailers to successfully emerge from Chapter 11,” wrote Mallory Duncan, the retail industry group’s general counsel. The issue hinges on the law’s requirement that unless a store closes within 210 days after a bankruptcy filing, the tenant is liable for the existing lease terms. By contrast, previous bankruptcy law gave tenants a 60-day deadline to reject or assume lease terms but allowed bankruptcy courts to extend that initial period indefinitely. Now, landlords alone have the power to grant extensions, Duncan noted. He called for Congress to repeal the 210-day period in favor of the previous framework, allowing judges to give bankrupt tenants more time to reorganize. Others told the subcommittee at a hearing last Wednesday that the more restrictive time frame is not to blame for Circuit City’s failure. “To suggest that the company was forced out of business because of Chapter 11 or the deadline to assume or reject its leases wildly misses the point and overlooks a complex set of factors which actually led to the company’s demise,” said Daniel Hurwitz, president & COO of Developers Diversified Realty Corp. Instead, he contended, the disastrous economy and the impossibility of obtaining enough financing to stay afloat doomed Circuit City. Hurwitz testified that flexibility is in landlords’ best interest. Developers Diversified, which was Circuit City’s largest single landlord, was willing to extend the 210-day deadline for the electronics retailer to reject its 50-odd leases at centers owned by the REIT, Hurwitz noted. Following the bankruptcy filing, Developers Diversified gave Circuit City a moratorium on rent payments that Hurwitz said amounted to a $25 million loan.In some cases, an extended period to reject or assume leases merely delays the inevitable, harming both tenants and shopping center landlords, according to Todd Zywicki, a professor of law for George Mason University. At the congressional hearing, he cited last decade’s drawn-out demise of Montgomery Ward. Despite a reorganization effort that lingered from 2007 to 2009, the venerable department store eventually liquidated. Meanwhile, the retailer’s co-tenants at a strip mall near Zywicki’s home in Falls Church, Va., suffered from reduced customer traffic. Only when a Target outlet replaced the ailing store did the center finally revive. “One cannot say with certainty that 210 days is the exact right time period for these decisions, but it is evident that a much longer period of time will have substantial costs as well,” Zywicki told lawmakers.