Despite strong consumer confidence and the lowest unemployment level in a decade, retail defaults this year are expected to surpass those in 2009 when the economy was in the throes of the Great Recession. Sorry, We’re Closed, The Economist, May 13, 2017. This general trend means brick-and-mortar shopping center owners and their property managers are increasingly facing the variety of legal issues that arise when a retail tenant discontinues business operations prior to expiration of the lease and often without prior notice to the landlord—an event commonly referred to as “going dark.” In addition to lost rental revenue, a suddenly-empty space may decrease foot traffic (lowering sales for existing tenants, while deterring prospective tenants) and may trigger clauses in other tenants’ leases, such as co-tenancy or termination rights, that may relieve them of the duty to pay full rent or operate. It is in the landlord’s best interest to resolve issues with the defaulting tenant, restore possession of the premises, and find a suitable replacement tenant. This article addresses a few of the common issues that arise in this context and some strategies used to resolve them. It is by no means an exhaustive list.
Possession
A quick way to recapture legal possession of the premises is to have the tenant (and any other occupants) return keys and execute a letter unequivocally confirming surrender of the premises. The letter should expressly reserve all other rights under the lease, which will necessarily include the landlord’s claims for rent and other obligations due under the lease. If, however, the tenant cannot be located or is otherwise unwilling to execute a surrender letter, the landlord must assess whether to rely on the tenant’s abandonment of the premises or whether to have a court issue a writ of restitution before reletting the premises to another tenant.
A tenant might also go dark, but continue to pay minimum base rent under the lease. In this case, the lease should be reviewed to confirm store closure is a breach of the operating covenant and a corresponding default notice should be issued in preparation for an eviction action. The landlord or property manager should document the failure to operate with photographs, and care should be taken to ensure acceptance of rent is without waiver of any non-monetary defaults by issuing the tenant a written “no-waiver” letter.
Bankruptcy
A retail tenant that discontinues business operations also presents a bankruptcy risk. If the tenant files a bankruptcy petition, the automatic bankruptcy stay prohibits all further lease enforcement action against the tenant, including collecting any unpaid obligations, declaring the tenant in default, or attempting to evict. But all is not lost for the landlord. Once a bankruptcy petition is filed, the tenant has a limited window of time to assume or reject the lease, and until the decision is made, the tenant is required to perform all lease obligations, including payment of post-petition rent. Failure to stay current provides the landlord a basis to seek relief from the automatic stay and evict.
Assumption of the lease is generally permitted only if the tenant cures all pre-and post- petition defaults. If the tenant rejects the lease, the tenant is required to immediately surrender possession to the landlord. Of course, delays and other issues in the bankruptcy proceeding can occur and a landlord should remain proactive throughout the process with experienced counsel.
Liquidation Sales
If prohibited by the lease (as it usually is), landlords and property managers should be on the lookout for a defaulting tenant to put on “going out of business” or a similar liquidation sale. If appropriate, the landlord should promptly issue a default notice attaching photographs of the offending signage and advertising materials and, depending on whether the tenant cures, consider whether to bring an eviction action or action to enjoin the offending sale, signage, or marketing material.
When Tenants Go Dark
Landlords should have an experienced adviser who can help navigate and resolve the many time-sensitive issues that can arise. If you have any questions regarding commercial and retail leasing, please contact Nate Somers or another attorney in MPBA’s business or real estate group.