LOS ANGELES—Commercial landlords should take notice. Within the last several months, one women's clothing retailer after another has gone out of business. On Dec. 4, 2014, Philadelphia-based Deb Shops filed Chapter 11. Next came Delia's, based in New York, which filed bankruptcy only four days later. On Jan. 9, 2015, Body Central, based in Florida, a chain with 265 stores, announced that it was closing all of its stores by way of an assignment for the benefit of creditors, an alternative to federal bankruptcy. On Jan. 15, Wet Seal, a Southern California-based company, filed its own Chapter 11. Then on Feb. 4, Cachè, another New York-based chain filed Chapter 11. In addition to these, Jones New York and Kate Spade Saturday recently announced that their retail locations would be closing.

If one is an anomaly, two a coincidence and three a trend, then we should pay attention when we see so many substantial retail women's clothing companies file bankruptcy all within a few months. There is anecdotal evidence that as millennials get older and start to assert their spending power, traditional brick-and-mortar businesses may be in for some tough times. Everyone has probably heard some version of the story about the teenage girls at the local mall, trying on clothes. Rather than buy anything, they all open up apps or websites on their smartphones and order the same clothes online (presumably, less expensively). Urban legend or not, if brick-and-mortar stores don't quickly adapt by focusing on the right amount of e-commerce, then the past three months are likely to repeat themselves.

And it won't be limited to women's fashion. We already know what happened to large chain bookstores in the last five years. Try to find one. Maybe you will get lucky and there will be a Barnes & Noble in the area. But there are not many left. Less than one for every 500 Starbucks locations, I would guess. Yet people still buy books. They just buy them online, or read them as e-books.

What about other industries? On Feb. 5, Radio Shack, for many years the electronics store of choice, became another retail casualty, filing Chapter 11 after months of fending off reports of its imminent demise. All one has to do is consider the buying habits of young people and their comfort with technology, and it seems inevitable that brick-and-mortar retailers will continue to face challenges.

But what about the landlords when a large retail chain files bankruptcy? Deb Shops had over 300 locations; Delia's over 90; Wet Seal over 500; Cachè over 300; and Radio Shack over 5,000. Any commercial landlord that was able to avoid being directly impacted by these filings should consider itself lucky, but should also use the opportunity to educate itself so that when one (or more) of its tenants does file bankruptcy, that landlord is ready.

Bankruptcy law and bankruptcy judges have a tremendous impact on what happens to leases in a particular bankruptcy case. All of the retail debtors mentioned above moved very quickly either to reject leases or to sell them. As a result, landlords also need to be prepared to move quickly themselves.

Prior to 2005, a Chapter 11 debtor tenant had only 60 days after the bankruptcy filing to assume or reject its commercial real property leases. Extending that time was, however, quite routine, and a debtor with many locations could often wait a year or more before deciding whether to keep, sell or forfeit a lease. As long as the debtor tenant paid rent beginning on the date of the bankruptcy filing—it didn't matter if the tenant was previously in default or behind on rent—multiple extensions were routinely granted.

When the Bankruptcy Code was amended in 2005, landlords pushed for and obtained some changes. One was that the 60-day period became 120 days. The other change was that only one 90-day extension is now allowed. Any extensions beyond this total of 210 days require landlord consent. Unless the landlord is willing to accept the status quo, debtor tenants know that they have only seven months in bankruptcy before the lease has to be kept, sold or forfeited.

Although these changes in the law were promoted by landlords, the rule of unintended consequences may have resulted in a different outcome than anticipated. At least based upon what we are seeing in these large retail cases, debtors appear to be making the pre-filing decision to liquidate assets. This is instead of entering bankruptcy with all options on the table but taking the risk that they are unable to reach a negotiated resolution with the landlord. Debtors are pre-arranging sales of the leases so that the sales occur as promptly as possible after the bankruptcy is filed. At the same time, debtors are seeking to hold early going-out-of-business sales for those locations where the leases are not profitable.

In all of the bankruptcies mentioned above, within mere days of the filing, the debtors had filed motions to address treatment of their leases. In some instances, they were motions to reject certain leases and to authorize going out of business sales. In others, they were motions to sell (through assumption and assignment under the Bankruptcy Code) certain leases. Landlords were left with only a few days to object. Not only are the debtors under duress, but so are the landlords.

And these time frames place bankruptcy judges under pressure to approve relief requested by a debtor, especially when such relief is couched in terms similar to the following: “if you do not approve this right away, Your Honor, then the case will collapse and convert to Chapter 7, and the recovery for creditors will be much less or zero.” As a result, there is a lot of inherent momentum against landlords in these retail cases.

If a landlord does have an objection, it must move quickly. Each landlord should be prepared to file a timely objection explaining in detail the specific lease provision that is being violated and how the landlord is being harmed. Relying on the bigger landlords which have many leases in the case is not an effective strategy.

The debtor and the court will often tailor a court order to address objections from a particular landlord—the squeaky wheel syndrome—but that order will not necessarily assist similarly-situated landlords who did not themselves object. Indeed, each affected landlord needs to pay attention and file an objection if there is a specific concern that can be addressed.

In sum, it seems clear that the retail bankruptcy boom may be just starting. In order to position themselves to move quickly, landlords should consult their bankruptcy counsel now for some advance planning.

Jeffrey A. Krieger is a business lawyer specializing in bankruptcy related matters at Greenberg Glusker Fields Claman & Machtinger LLP. He may be contacted at jkrieger@greenbergglusker.com. The views expressed here are the author's own.

Instant Insights /

As Retail Bankruptcies Rise, Landlords Must Prepare

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