How Retailers in Chapter 11 Can Exit or Assign Costly Store Leases
Commercial leases are often among the most pressing financial obligations for retailers facing economic distress. Leases can run from three to 10 years, making them a significant financial liability when a sales location no longer generates enough revenue to cover rent and operating costs. Percentage rent clauses and co-tenancy requirements can further keep retailers tied to locations that are no longer viable.
Bankruptcy Code 11 U.S.C. § 365 gives retailers encumbered with leases a powerful tool in Chapter 11, allowing them to shed unprofitable locations or reposition valuable ones as part of a broader restructuring strategy. A debtor may choose to assume leases for profitable locations, assign leases to third parties or reject leases that have become burdensome. When a lease is rejected, it is treated as a breach, allowing the debtor to terminate its obligations and vacate the premises.
Typically, the debtor has 120 days after the initial bankruptcy filing to assume or reject the lease. In some cases involving particularly large organizations or other extenuating circumstances, the court can grant extensions. This deadline requires early evaluation of each location and its financial performance.
Rejection also limits the landlord’s recovery. Instead of pursuing compensation for all unpaid rent for the remainder of the lease, they are usually subject to a damages cap of either 15 percent of the remainder of the lease, provided that it is three years or less or one year’s rent, whichever is greater. The business is typically still responsible for any rent owed before rejecting the lease.
Assignment follows a different path. Even if a lease restricts assignment under its original terms, Chapter 11 may allow the debtor to assign the lease to another tenant. If the location has value, such as strong foot traffic or favorable terms, a retailer may be able to transfer the lease and, in some cases, realize value from what would otherwise be an ongoing liability.
Business leaders evaluating individual facilities and making decisions about the future of commercial leases can benefit from legal assistance. The guidance of an attorney during the early stages of a Chapter 11 bankruptcy is vital for informed decision-making.
The Law Offices of Michael Jay Berger in Beverly Hills assists retailers and other businesses in Chapter 11 bankruptcies throughout southern California. Schedule a free initial consultation by calling 310-271-6223 or contacting us online.
