Bankruptcy Bill May Help
Retail Landlords

The recently passed bankruptcy-reform bill may turn out to be a plus for landlords who own retail property while making it harder for struggling retailers to emerge from bankruptcy protection.

The bill, which passed Congress and was signed by President Bush in April, will take effect in October and strengthens landlord rights in a number of ways, including forcing retailers to make decisions on leases much more quickly and moving landlords into a preferred class of creditors.

"It's good for real-estate investors and it's good for landlords," says Michael Straneva, a partner in charge of real-estate transaction advisory services at Ernst & Young.

A retailer will have seven months after it files for bankruptcy protection to decide whether to assume or reject a lease, unless the landlord agrees to an extension. Previously a judge could extend it indefinitely, which left landlords in limbo about their space.

If a retailer rejects the lease, the landlord goes to the back of the line with all the unsecured creditors (who typically get cents on the dollar) for claims on any unpaid rent. The landlord can, of course, rerent the property. If a retailer assumes the lease, it must pay any back rent and the landlord moves to the front of the line of creditors if the retailer eventually is forced to liquidate.

"It is a financial grab by the landlords, who are one group of creditors who should be treated equally with other creditors but are now getting favorable treatment," says Harold J. Bordwin, president and chief executive of Keen Consultants LLC of Great Neck, N.Y., a firm that helps retailers restructure.

The big Christmas shopping season is when troubled retailers typically make their last stands. Most retail bankruptcies are filed in the first quarter after the holiday sales boost fails to save them. Retailers that reorganize want to have at least one Christmas after restructuring to figure out which stores it can let go and which it wants to keep.

Now retailers are likely to have to choose by October which leases to keep unless their landlord agrees to an extension. "When a retailer now goes into bankruptcy they're going to know they have to have these decisions done more quickly," Mr. Straneva says. "There's a real consequence not to do that."

Retailers typically have been able to wait until the end of the restructuring process before they decide whether to hang on to a lease or reject it, and that allows them to make better decisions about which to keep, Mr. Bordwin says.

Landlords are pleased with the removal of uncertainty the deadline gives them. "Seven months is a long time for a landlord to wait to find out if they have a tenant," says Norman M. Kranzdorf, who heads up the bankruptcy task force for the International Council of Shopping Centers and is chairman of Amterre Property Group LLC of Boulder, Colo. "You have to remember, before a tenant files for bankruptcy it has months, if not years, to decide whether a given store is good or bad. It doesn't come as a shock on bankruptcy day."

While landlords did benefit from these provisions of the bankruptcy bill, retailers were also victors. The new law will make it harder for individuals to walk away from their debts when they file for bankruptcy. Retailers lose about $1 billion a year to consumer bankruptcies, according to a spokesman for the National Retail Federation.

"You have to pick your battles," says Mallory Duncan, senior vice president and general counsel for the National Retail Federation. "We focused an overwhelming amount of firepower in trying to fix problems in the consumer part."

Some who watch the industry say the law could force more struggling retailers to liquidate instead of restructure. Without being able to make it through a Christmas season before rejecting certain leases, some retailers may just fold. Creditors' committees may push for liquidation rather than let landlords cut in the line of who gets paid first, Mr. Bordwin says.

The issue hasn't been on the agenda of many companies because the economy is doing well. "Bankruptcies aren't so prevalent right now," Mr. Straneva says. "But there are big implications. These are not small shifts."

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