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BANKRUPTCY LAW BRINGS LANDLORD RELIEF

BY SASCHA BRODSKY

President George W. Bush signed into law a bill last month that, among other provisions, limits to 120 days the length of time a bankrupt retailer may sit on a closed store before accepting or rejecting the lease.

Credit card issuers supported the measure, which is called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, because it obligates consumers in some cases to repay part of their debts during bankruptcy. But certain sections of the new law are especially important to the shopping center industry.

ICSC had lobbied for the bill, writing to the Senate Judiciary Committee that reforms were necessary to end certain abuses, such as the disregarding of the shopping center protections in the bankruptcy code.

“Currently, many bankruptcy judges are extending the 60-day period retailers have to assume or reject their leases for months or years — even up to the time a reorganization plan is confirmed,” ICSC wrote. Under the new law, the period is set at 120 days plus a 90-day extension for exceptional circumstances.

This law requires adherence to a lease’s “use clause” upon assignment, giving control over leases back to the leasers. It also provides for greater representation of shopping center owners on creditor committees.

Section 405, for example, gives bankruptcy judges a lot of leeway to change the membership of a committee in order to ensure the adequate representation of creditors. Currently, owners are often excluded from these committees, even though they may qualify to serve or could have significant damage claims.

Another clause, section 328, allows a retailer to assume a nonresidential lease containing a “nonmonetary” default, so long as the default is “cured” by performance at and after the time of assumption.

A store that has been closed for business must be reopened (or cured) once its lease is assumed, for instance. Currently, many stores remain closed after their leases are assumed, even though the code requires such defaults to be cured before the leases can be assumed.

Another important clause for retail real estate landlords is section 445, which treats rents due under an assumed and subsequently rejected lease as an administrative priority for two years after the date of rejection or a turnover of the premises (whichever happens later). Any remaining rents due would be treated as an unsecured claim.