Commercial Real Estate Leases

COMMERCIAL REAL ESTATE LEASES PRACTICAL INFORMATION ON NEGOTIATIONS AND ENFORCEMENT BANKRUPTCY: WHAT TO DO WHEN IT HAPPENS

November 4, 2008

Panelists Jeffrey N. Pomerantz, Esq. Brian D. Huben, Esq. Pachulski Stang Ziehl & Jones LLP Katten Muchin Rosenman LLP Los Angeles, CA Los Angeles, CA

The Automatic Stay - What it is, and why you should care

► 11 U.S.C. § 362

● Certain creditor actions prohibited

♦ 11 U.S.C. § 362 and ipso facto clauses

● Relief from the stay – what can you get and when can you get it?

● Grounds for relief

♦ For “cause” based on pre-petition termination or forfeiture of the lease

□ 11 U.S.C. § 362(d)(1)

□ Notice to pay or quit containing forfeiture election

□ Lease not property of the estate under 11 U.S.C. § 541

Vanderpark Properties, Inc. v. Buchbinder (In re Windmill Farms, Inc.), 841 F.2d 1467 (9th Cir. 1988)

In re Escondido West Travelodge, 52 B.R. 376 (S.D. Cal. 1985)

Kearny Mesa Crossroads v. Acorn Investments (In re Acorn Investments), 8 B.R. 506 (Bankr. S.D. Cal. 1981)

Marquand v. Smith (In re Smith), 105 B.R. 50 (Bankr. C.D. Cal. 1989).

1 COMMERCIAL REAL ESTATE LEASES PRACTICAL INFORMATION ON NEGOTIATIONS AND ENFORCEMENT BANKRUPTCY: WHAT TO DO WHEN IT HAPPENS

November 4, 2008

The Automatic Stay - What it is, and why you should care (continued)

♦ Lack of “equity” in the property

□ 11 U.S.C. § 362(d)(2)(A)

In re Flexipak, Inc., 49 B.R. 641 (S.D.N.Y. 1985)

♦ Property not necessary to an effective reorganization

□ 11 U.S.C. § 362(d)(2)(B)

United Sav. Ass’n v. Timbers of Inwood Forest Assocs., 484 U.S. 365 (1988)

♦ Timing of the motion – moving too early in the case?

♦ When must the court rule on the motion?

□ 11 U.S.C. § 362(e)

♦ Shifting burden under the statute

□ 11 U.S.C. § 362(g)

● What can the Debtor do?

● Where’s the rent check?

♦ Motions to compel and relief from the stay

● Security deposits

● Disposition of personal property

November 4, 2008

Post-Petition Use and Occupancy of the Premises by the Debtor

► 11 U.S.C. § 365

● Debtor may assume, assume and assign, or reject the lease

● When must the Debtor decide?

♦ Initial 120 day period

□ 11 U.S.C. § 365(d)(4)(A)(i)

□ 11 U.S.C. § 362(d)(4)(A)(ii) ( plan confirmation)

♦ Single 90 day extension

□ 11 U.S.C. § 365(d)(4)(B)(i)

♦ Additional time with landlord’s prior written consent

□ 11 U.S.C. § 365(d)(4)(B)(ii)

● The Debtor’s obligations to pay rent and timely perform under the lease

♦ 11 U.S.C. § 365(d)(3)

□ Debtor should timely perform all obligations under the lease and pay rent pending assumption or rejection; landlord is not required to act

Towers v. Chickering & Gregory (In re Pacific-Atlantic Trading Co.), 27 F.3d 401 (9th Cir. 1994)

In the Matter of The Barrister of Delaware, Ltd., 49 B.R. 446 (Bankr. D. Del. 1985)

November 4, 2008

Post-Petition Use and Occupancy of the Premises by the Debtor (continued)

♦ The billing date theory

□ the debtor must make any payment under a lease that becomes due after the order for relief, even if attributable to periods prior to the order for relief

Centerpoint Properties v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 268 F.3d 205 (3rd Cir. 2001)

In re HQ Global Holdings, Inc., 282 B.R. 169 (Bankr. D. Del. 2002)

♦ The pro-ration/accrual theory

□ the Debtor must pay rent as it accrues for every day the debtor occupies the property

In re NETtel Corp., Inc., 289 B.R. 486 (Bankr. D. D.C. 2002)

In re Handy Andy Home Improvement Centers, Inc., 144 F.3d 1127 (7th Cir. 1998)

♦ Pro-ration v. billing date

□ Courts have generally recognized that the proration rule holds a slight majority

In re Furr’s Supermarkets, Inc., 283 B.R. 60 (Bankr. 10th Cir. 2002)

In re Treesource Industries, Inc., 363 F.3d 994 (9th Cir. 2004)

November 4, 2008

● Assumption of the lease

♦ What it means

♦ What it requires

□ Cure of existing defaults - 11 U.S.C. § 365(b)

● Assumption and assignment of the lease

♦ What it means

□ Release of Debtor - 11 U.S.C. § 365(k)

□ Cure of existing defaults - 11 U.S.C. § 365(b)

□ Adequate assurance of future performance

11 U.S.C. § 365(f)(2)

□ Shopping center leases

different standard applies - 11 U.S.C. § 365(b)(3)

♦ What about triple-net adjustments?

November 4, 2008

● Rejection of the lease

♦ What it means

□ Future rent damages capped by statute

11 U.S.C. § 502(b)(6)

□ Exercise of Debtor’s business judgment

♦ What the Debtor leaves behind and what to do with it

Bankruptcy claims

► 11 U.S.C. § 502(b)(6) and Federal Rules of Bankruptcy Procedure 3001 - 3007

● What’s a bar date?

● What can a landlord claim?

● When do claims get paid?

Proactive Involvement in Bankruptcy Cases

► Participation on Creditors’ Committee

● Committee Formation Process

● Pros

● Cons

November 4, 2008

Proactive Involvement in Bankruptcy Cases (continued)

► Other Ways to Gather Information

● Court Pacer Website

● Debtor Case Website

A landlord can terminate a lease based upon the tenant's filing of a chapter 11 bankruptcy petition if the lease contains a provision making the file a bankruptcy petition an event of default. TRUE or FALSE?

A landlord can prevent a tenant who has filed bankruptcy from assigning the lease to a third party if the lease requires the landlord's consent to the assignment. TRUE or FALSE?

Landlords of shopping centers have greater protections against the assignment of leases of their tenants than do landlords of other commercial property. TRUE or FALSE?