ALP: How can I minimize the impact of retailer bankruptcies and store closings on my shopping center and existing tenants?
November 2008
Advance planning is integral to any successful strategy. Understand your portfolio. Undertake a complete and thorough review of your leases, focusing on co-tenancy, radius, tenant mix, prohibited use, and exclusive use provisions. Primary consideration should be given to understanding the implications of the closing of a particular retailer, or the possibility of being forced to accept a new tenant as a result of a bankruptcy sale. Stores may be closed or a bankruptcy court may assign an existing lease to a new tenant with little notice. If the store closing of a mini-anchor retailer will permit several other tenants to either close or pay reduced rent, this information must be analyzed as soon as possible. Similarly, if a prospective assignee of a bankrupt tenant will cause a radius, tenant mix, or exclusive use violation, the landlord must be prepared to take the appropriate action with the bankruptcy court to prevent such results.
In addition, prudence should be exercised when dealing with struggling tenants. Landlords should remain in close contact with each of their tenants to ensure timely payment of rent and other lease obligations. Once a tenant files for bankruptcy, it’s generally too late to collect delinquent rent. Landlords should also use care in structuring lease termination agreements with struggling tenants. Lease termination payments made on account of delinquent rental obligations will likely be avoided in a subsequently filed bankruptcy, negating any benefit received by the landlord in agreeing to an early lease termination.
With commentators warning of an unprecedented wave of retail bankruptcies and store closings at the conclusion of the holiday shopping season, landlords should act now to review their portfolios, understand the implications of store closings and bankruptcies, and take the appropriate action to limit any adverse impact. Often, bankruptcies and store closings of one tenant result in the bankruptcy or closing of other tenants, and in some cases, bankruptcy of the landlord. Proper advance planning will help identify and reduce such risks.
