Landlords need a better playbook for handling pandemic-related tenant bankruptcies, attorneys said during a session called Emerging trends in bankruptcies affecting retail real estate at ICSC’s OH/KY/IN/MI/PA Retail Development & Law Symposium virtual conference last week.

Before the pandemic, tenants were likely to contact landlords as many as six months before a Chapter 11 filing to try to restructure leases and cut deals. But after a wave of bankruptcies triggered by the pandemic, landlords have begun to expect troubled tenants to file and have become reluctant to do deals that might have to be renegotiated under Chapter 11, said Frost Brown Todd attorney Ronald Gold.

Meanwhile, many tenant bankruptcies now involve never-before-seen abatement or deferral motions. “In May of 2020, things fundamentally changed and we saw J.Crew, Neiman Marcus, Stage Stores, JCPenney and Tuesday Morning file for bankruptcy,” said Allen Matkins of counsel Ivan Gold, who represents landlords and property managers. “We had back-to-back-to-back-to-back filings.”

JCPenney filed an “emergency” bankruptcy on a Friday afternoon, followed by a hearing Saturday morning that provided substantial rent relief for the retailer, he said. Landlord lawyers had to stay up all night reading the retailer’s debtor-in-possession and financing documents. “Being nimble when a debtor filed for bankruptcy has always been important, but it took on greater urgency in 2020,” he said.

Of the major retail bankruptcies that have occurred since May 2020, all had first-day hearings on a day’s notice, said Ronald Gold. “First-day hearings are so critical for landlords and are often overlooked. You have to be able to react and negotiate on the very first day to make sure that the lender is not getting liens on leases,” he said. “For many landlords, it can cause a default in underlying financing documents.” In the past, for example, one landlord could object to part of the tenant’s restructuring plan and those objections could apply to all landlords. “Now they’re doing carve-outs that say, ‘This applies only to this objecting landlord.’”

Deferred rent

Landlords also should figure out early the fate of the rent that a retailer deferred during the pandemic should that retailer file for bankruptcy protection before paying. “Is deferred rent a claim based on when it was originally due?” Ivan Gold asked. “Is it based on when it’s now due under the deferral agreement? Can it be an administrative claim post-petition based on the lease amendment?”

These questions have yet to be litigated and are sure to generate controversy in 2021 as lawsuits are brewing, he said. “That’s the tiny time-release capsule of the COVID pandemic. What exactly are the parameters of the treatment of deferred rent on a claims basis?”

Michael Jerbich — who, as B. Riley Real Estate president, represents tenants in such negotiations — said retailers will expect deferred rent payments to be considered prepetition and waived.

As for landlord bankruptcies, don’t expect a significant uptick in foreclosures for another six to 18 months because properties still need to stabilize and be appraised before a lender could consider selling it, Frost Brown Todd Louisville office member-in-charge Geoff White said at a session called What do you do when your loan comes due? “We’re seeing receivership actions being initiated that are not coupled with a foreclosure action, which is a tell to a borrower that lenders want to keep their options open and don’t want to own certain types of properties. It’s a prudent way for lenders to handle the unknown.”

Registered attendees of the OH/KY/IN/MI/PA Retail Development & Law Symposium can watch recordings of these and other sessions here.