(Bloomberg)—Retailers have a new tool to use in the scuffle between landlords and tenants: a court ruling that could help them withhold rent.
Pier 1 Imports Inc. is the latest retailer to seize on the precedent, asking a judge to let it skip rent payments amid the coronavirus outbreak that has shuttered stores across the U.S. The request comes after a judge in New Jersey late last month approved Modell’s Sporting Goods Inc.’s request to pause its bankruptcy until the end of April, allowing it to forgo rent and other required payments.
The ruling is significant because even in bankruptcy tenants are expected to pay rent on time, unlike many other obligations such as bond debt. Now, retailers both in and out of bankruptcy court are informing landlords that they’re cutting or withholding rents as customers shelter at home and states order most merchants to close.
“Are the landlords taking it upside the head in these deals because there is nothing they can do?” said bankruptcy attorney Brett Miller with the law firm of Morrison & Foerster. “Are they going to get any of that rent?”
Amid the pandemic, lenders have been reluctant to push retailers to file for bankruptcy because stores can’t conduct the liquidation sales needed to come up with money to repay creditors. That could change if the lenders know that a judge will grant a temporary suspension.
No Shoppers
Property owners expect many April rents won’t get paid, and tenants are looking for legal justifications to skip sending in a check, said David Pollack, a retired bankruptcy attorney who spent decades representing landlords. A pause in rent makes sense under the circumstances, Pollack said, so the question then is what happens when business returns to normal.
“Everybody wants to know, ‘What are my rights?”’ Pollack said. “Do I have a right not to pay rent because the governor ordered me not to open or the landlord closed the mall?”
Sporting-goods retailer Modell’s filed for Chapter 11 bankruptcy March 11 and said it would begin liquidation sales in all of its 153 stores. But the company was forced to stop the liquidation sales as states and cities mandated that non-essential merchants shut down and residents asked to stay home. The judge overseeing the case on March 27 agreed to pause the proceeding until April 30 and let Modell’s skip rent payments.
“You can’t have a liquidation with stores closed by the government,” Miller said.
Already, it’s become clear that not every court is going to allow retailers to skip rent payments. In early March Judge Brendan L. Shannon in Delaware denied a similar request in the case of restaurant chain Craftworks Parent LLC.
Preferential Treatment
But any retailer facing bankruptcy should consider asking, said Michael Sirota, the lawyer representing Modell’s.
“It’s a new world order,” he said. “Any fresh Chapter 11 debtor that files and got caught in the middle of this pandemic should seriously consider hitting the pause button.”
For Modell’s, the suspension was a best-case scenario, Sirota said, because instead of converting the case to an immediate liquidation with nothing to do with the goods, the stores can wait to conduct going-out-of-business sales that will bring in proceeds for lenders, landlords and other creditors.
The U.S. bankruptcy code gives landlords preferential treatment in a number of ways. Unpaid rent is given a higher repayment priority than other kinds of debt, giving landlords equal status with employees and lawyers when it comes to who gets paid first. Typically, these so-called administrative claims are only outranked by debt owed to secured lenders. By classifying rent as an administrative expense, landlords usually get back all rent owed them during the case.
Another rule forces bankrupt companies to make quick decisions about which leases they will keep and which they will cancel. That gives retail companies less time to reorganize, since they can hold hundreds or thousands of leases.
The Modell’s decision could open the door to more near-term filings if revenue-starved companies could postpone paying expenses and holding liquidation sales, Sirota and Pollack said.
“I think people are watching how this plays out,” Sirota said.
To contact the reporters on this story: Lauren Coleman-Lochner in New York at [email protected]; Steven Church in Wilmington, Delaware at [email protected].
To contact the editors responsible for this story: Rick Green at [email protected]
Michael B. Marois, Christopher DeReza
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