Renegotiating a lease: Landlord in Bankruptcy

[Bobo]

A good friend and coworker asked me about this at lunch. I know that several of you know this back to front so I wanted to put it up here first for suggestions.
...and yes, I will make her sign up and join in our Reindeer games


We currently have a lease for a (restaurant Franchise) in a retail shopping center that has filed bankruptcy. Our lease has another 3 years. The building will be going up for auction the end of August. We want to use this opportunity with a new landlord to renegotiate our lease.

There are several points in our favor:
- the shopping center is still maybe 40% occupied after 2 years (40% is a generous estimate)
- we were the first store to open and we were the only tenant open for 8 months
- two other restaurants in the center are either completely closed on Sunday or only open for dinner because Sunday traffic is so slow
- all tenants, including ourselves, are struggling because of the landlord's inability or unwillingness to lease out the shopping center

Any pointers or recommendations for a lawyer who has experience with this type of deal would be greatly appreciated.

 

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[Reefbreak]

Just a few random thoughts here...

We currently have a lease for a (restaurant Franchise) in a retail shopping center that has filed bankruptcy.

Is the lease with the Franchisor or Franchisee? In some Franchise situations, the Franchisor will sign the lease with the Landlord (LL), and then do a sublease with the Franchisee. Either way, the Franchisor normally has a few real estate people that can offer guidance to their Franchisees.

We want to use this opportunity with a new landlord to renegotiate our lease.

Although there may be lease specific language regarding a change in ownership due to bankruptcy... normally, a lease remains in full force and effect with a new owner. If your friend has signed personally on the lease or as a guarantor, they will have even less negotiating power if the new owner can determine that your friend has a positive net worth. If your friend signed the lease as an LLC or other legal entity and did not give a personal guaranty, they will obviously have more leverage.

There are several points in our favor:
- the shopping center is still maybe 40% occupied after 2 years (40% is a generous estimate)
- we were the first store to open and we were the only tenant open for 8 months
- two other restaurants in the center are either completely closed on Sunday or only open for dinner because Sunday traffic is so slow
- all tenants, including ourselves, are struggling because of the landlord's inability or unwillingness to lease out the shopping center

You may want to check the lease for language regarding occupancy minimums that the LL must meet. Tenants will sometimes have language added to the lease where a rent reduction is due the Tenant (or some other positive recourse) if a shopping center falls below a minimum occupancy percentage, normally in the 70-80% range. Normally, only national Tenants have this language added, but it is worth a look.

I would suggest that the LL might be willing to renegotiate the lease if your friend can demonstrate their rent to sales ratio is very high... say more than 20%. (This percentage varies according to use). However, trying to "prove" that a LL has been negligent in leasing the center might be tough to prove, especially in this economy.

Before your friend goes to the new owner to renegotiate terms, they will want to make sure they have sought relief from the Franchisor, food suppliers, etc. The LL is going to be more willing to renegotiate rent if they know that the Franchisor has lowered their franchise fees, or that a food supplier has offerred better credit terms, etc. In other words, the LL will not want to be the only one offerring financial assistance.

The best advice I can give is to employ a good real estate attorney or commercial real estate broker to help with the situation. An ownership change normally involves tenants being asked to sign estoppel agreements. This will be a good time (prior to signing the estoppel agreement) to perhaps renegotiate lease terms.