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  • By Thomas Onder, Esq., Stark & Stark

Leasing tools to protect payments from an impending tenant in bankruptcy

Volatility continues in the retail real estate environment with many traditional retailers using the bankruptcy process to reorganize to right size themselves or in some cases leave the market all together. When space is returned to a landlord it can present opportunities to reinvigorate a shopping center with fresh concepts that are trending up. However, the bankruptcy tenant may leave the landlord with an arrearage for both the pre- and post-bankruptcy amounts owed that it may only see recoupment in pennies on the dollar, at best, years from the filing. Many landlords ask themselves, after the fact, is there anything that can be done to mitigate this risk? Unfortunately, landlords cannot stop a tenant from filing for bankruptcy protection. But there are a few tools that a savvy landlord can implement during the lease negotiations that could manage and/or lessen the risk of a large arrearage. These include: third-party guaranties; larger security deposits; and/or letters of credit. There are pros and cons to each of these mitigation tools, but it is valuable to ascertain if one or all can be used on a particular deal.

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