Retail · Leases
Why a Tenant Bankruptcy Can Be Good For You
Lease assumption transfers your space to a stronger covenant, pays your arrears and costs you no allowance. Here is the mechanism.
A tenant files Chapter 11. The instinctive landlord reaction is that this is bad. Often it is the opposite, and understanding why changes how you respond.
What actually happens to your lease
In bankruptcy the debtor can assume a lease, assign it to someone else, or reject it. If the lease is below market, it is an asset of the estate and will be marketed, which is exactly what the Party City, Joann, Big Lots and Bed Bath auctions were.
If someone buys the right to your lease, three things follow that favor you:
Cure costs get paid. The acquirer must bring the lease current, covering rent and charges the bankrupt tenant owed you at filing. In the Joann auction those cure amounts ran from nothing to around $58,000 per site.
Rent starts immediately. The assignee becomes responsible for rent, insurance and charges from assumption, before opening. Havertys, taking four Bed Bath leases, paid over $2 million in rent on sites it had not yet opened.
You fund no allowance. An assumed lease is the existing lease. There is no new tenant improvement package, no free rent, no new commission.
What you give up
Control, mostly. You do not choose the assignee, the court approves them against a reasonable-assurance standard, and you may end up with a use you would not have selected. Your co-tenancy provisions and exclusives can constrain this, which is a good reason to know what is in your leases before the filing rather than after.
And if the lease is above market, nobody bids. It gets rejected, you get the space back, and you are in a normal re-tenanting with all of its costs. Your claim for the remaining term is capped by statute and largely unrecoverable.
The underwriting point
When you buy a center with a shaky tenant, do not model only the downside. Model both branches: assumption at the existing rent with a better covenant and no cost, versus rejection with full downtime, allowance and commission. The probability-weighted answer is usually better than the fear.
Run both branches: Strip Plaza underwriting takes renewal probability, downtime, allowances and commissions separately so you can price each outcome.
Related notes
How to read this. These are working notes. Figures come from public reporting and from the models on this site, and market conditions change, check anything time-sensitive against the source before you rely on it. Nothing here is investment, tax or legal advice, and no note is a substitute for diligence on a specific property.
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