Landlord Protections Give Bankruptcy-Preventing Deals a Boost

Commercial landlords have a greater incentive to grant rent deferrals to struggling brick-and-mortar businesses following a temporary rule change that prevents bankrupt tenants from clawing back rent payments made under those deals.

Bankruptcy law allows debtors to sue to get back certain “preferential” payments they made in the 90-day period before the bankruptcy was filed. But the latest rule change, part of the $2.3 billion stimulus package Congress passed in late December, blocks bankrupt tenants from such lawsuits to recoup rents paid in a deferred rent agreement they struck with their landlords within the 90-day period.

The change expires in December 2022. But without it, retailers, restaurants, movie theaters, and other commercial tenants that received a break from landlords during the pandemic could try to get their rent back after filing for bankruptcy, said attorney Ivan Gold of Allen Matkins Leck Gamble Mallory & Natsis LLP.

“No good deed goes unpunished,” he said. “This was to facilitate agreements so that people wouldn’t go bankrupt.”

With thousands of commercial leases being restructured as a result of the pandemic, the temporary change “opens the door for landlords and tenants to work together,” said B. Riley Real Estate LLC President Michael Jerbich, who advised companies like J.C. Penney Co. and Sears Holdings Corp.

Congress focused on large landlords such as mall and shopping center owners, but the new law also benefits distressed tenants by encouraging more leniency toward rent.

“I think that these provisions are meant to help debtors more than anything,” said attorney Fred Ringel of Robinson Brog Leinwand Greene Genovese & Gluck PC. “There might be a bankruptcy avoided because of it.”

‘Preferential Transfers’

The bankruptcy code normally allows debtors to sue over “preferential transfers” they made in the 90 days before bankruptcy that weren’t in the “ordinary course of business,” which includes payments under rent deferral agreements.

Such payments can be seen as debtors preferring the landlord’s debt over other creditors, who are instead forced to pursue their pre-bankruptcy claims through the court process.

Credible lawsuits against landlords to claw back preference payments are “fairly rare,” but they do happen, said bankruptcy attorney Robert LeHane of Kelley Drye & Warren LLP. And they typically settle at around 50 cents on the dollar, he said.

At the start of the pandemic a year ago, Gold was bombarded with calls from commercial landlords concerned about the risks of entering into rent deferral agreements with businesses that were shut down indefinitely.

“That’s all anyone was talking about that week,” said Gold, who specializes in real estate-related litigation.

LeHane encouraged his landlord clients to make deferred rent deals during the pandemic, but he also warned them of their potential legal exposure.

Targeted Relief

Last year, Gold partnered with the International Council of Shopping Centers, a retail property trade association, to craft bill language that ultimately became part of the bankruptcy code revision. The billlater was packaged with other amendments targeted specifically at Covid-19’s impact on landlords and tenants.

The stimulus measure also gives bankrupt companies more time to decide whether to keep or reject commercial leases. Small businesses in Chapter 11 can also seek to defer rent payments for up to 120 days.

These changes, like the clawback provision, also expire in December 2022.

“When you look at it in its totality, it was a very balanced approach for landlords as well as tenants,” said Betsy Laird, an ICSC senior vice president. The law should help tenants and landlords “ride out this storm,” she said.