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New Bankruptcy Law Aids Commercial Landlords
By Jim Vidmar and Brad Englander
Several changes in the new bankruptcy law (effective October 17, 2005) stand to give commercial landlords certain new advantages when tenants file for bankruptcy. The new law will likely cause landlords and tenants to rethink their strategies, both in the leasing stage and later.
Certain of the most significant changes are summarized as follows:
I.
- Current Law: The current Bankruptcy Code provides that a lease of commercial real estate must be assumed or rejected by a debtor within sixty days after filing of bankruptcy, or it is deemed rejected. A court may grant a debtor unlimited extensions of time to assume or reject such leases. These extensions are routinely granted, especially in larger cases.
- New Law: A debtor will have 120 days after the bankruptcy, or the date of confirmation of a plan, whichever is earlier, to assume or reject a lease for real property. A court may extend this period for an additional ninety days upon a showing of good cause. Any subsequent extension will require the prior written consent of the landlord.
- Observation: This change is a major coup for landlords, as it will put significant pressure on tenants to evaluate their leases early in chapter 11 cases. This evaluation can be difficult, particularly in larger cases. Some debtors may be forced into making premature decisions on lease assumption/rejection, and may forfeit the value of rejected leases without adequate time to make a sound determination. Tenants with leverage might seek to soften this amendment in their leases by obtaining the landlord’s written waiver of this requirement.
II.
- Current Law: Section 365(b) of the Bankruptcy Code provides that a trustee must cure any defaults prior to assumption of an unexpired lease.
- New Law: With regard to unexpired leases of real property, in order to assume and assign, debtors need not cure non-monetary defaults under such leases to the extent that such defaults are incurable, except that defaults arising in connection with failure to operate in accordance with a lease must be cured at the time of assumption. Upon assumption and assignment of a lease, debtors must immediately cure such non-monetary defaults and compensate landlords for the pecuniary loss suffered.
- Observation: By clarifying that nonmonetary defaults under unexpired leases of real property do not need to be cured, and in excepting such defaults from this requirement, the new legislation clarifies that debtors may assume and assign leases that had fallen into non-monetary, incurable default.
- Observation: The new law may have certain pitfalls. For example, when shopping center leases with continuous operation provisions are assigned, the assignee may need to be in full compliance with the continuous operation provision immediately upon assignment. The new law is a significant change from the old practice of allowing assignees a reasonable time after assignment to fit out the space and begin operations.
Period for Filing Plan Under Chapter 11
- Current Law: Section 1121 of the Bankruptcy Code provides that a chapter 11 debtor has the exclusive right to file a plan of reorganization and obtain the requisite votes for the plan’s acceptance during the first 120 days of the case. On request, the Court may increase the debtor’s 120-day exclusivity period. At the expiration of the exclusive period, any creditor can file its own plan.
- New Law: The right of a debtor to obtain extensions of the exclusivity period for filing of a plan is limited to eighteen months after the filing. The right to extend for “cause” beyond the initial time limitation has been eliminated.
- Observation: Particularly in large or complex cases, it often is impossible for debtors to formulate a viable reorganization plan quickly enough to meet the relevant time limits. In all cases, fixed time limits without the ability to extend for “cause” may reduce the incentive for creditors to work with debtors to negotiate the terms of a reorganization plan. Instead, the amendments may increase the incentive for certain creditors to wait until the end of a debtor’s exclusive period, and then to propose their own plan.
For additional information, contact Jim Vidmar at (301) 961-5126, jvidmar@linowes-law.com, or Brad Englander at (301) 961-5125, benglander@linowes-law.com.
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