- On November 6, 2023, co-working and commercial office rental company WeWork Inc. (“WeWork”) and its 516 debtor affiliates (collectively, the “Debtors”) commenced chapter 11 cases in the United States Bankruptcy Court for the District of New Jersey.
- WeWork cited ongoing lease portfolio rationalization needs, longer term economic disruptions caused by the COVID-19 pandemic, such as slower than expected return-to-office processes, and ongoing inflationary pressures as the principal causes of the Debtors’ financial distress and need for bankruptcy relief.
- The Debtors entered into a prepetition Restructuring Support Agreement that contemplates a reduction of their funded debt by approximately $3 billion and establishes milestones for the completion of the Debtors’ chapter 11 cases.
- Specifically, the RSA contemplates that the Debtors will file a chapter 11 plan and related pleadings by February 4, 2024, confirmation of the plan and approval of the disclosure statement will occur by February 24, 2024, and entry of the plan confirmation order and occurrence of the plan effective date is targeted for March 5, 2024.
- One of the Debtors’ initial bankruptcy motions seeks to reject 69 unprofitable leases. The Debtors have also sought to establish uniform procedures for the assumption and rejection of executory contracts and unexpired leases moving forward.
- WeWork has a global footprint comprised of 779 locations across 40 cities in North America and 139 cities worldwide.
- We note that distress in the commercial real estate industry comes amid broader distress across various sectors that has resulted in significantly increased chapter 11 bankruptcy activity during 2023 that may continue into 2024.
Considerations for Landlords in Tenant Bankruptcy Cases
- When a debtor files for bankruptcy, a stay under section 362 of the bankruptcy code automatically applies to prevent any creditor attempts to collect pre-bankruptcy claims, both formal (e.g. eviction lawsuits) and informal (e.g. default/demand letters). The stay also applies to a common remedy of “setoff” where parties apply mutual claims and debts against each other to settle an account.
- Setoff against a security deposit is typically prohibited by the automatic stay, while drawing on a letter of credit provided by the debtor to the landlord typically is not. Consultation with counsel on this point is critical to avoid potential sanctions by the bankruptcy court.
- Approval of the bankruptcy court is required before taking actions prohibited by the stay, and willful violations of the stay can result in damages and court sanctions being assessed against the offending party.
- Section 365(d)(3) of the bankruptcy code generally requires debtor tenants of non-residential real property to fulfill all of their obligations under their unexpired leases during their bankruptcy case and prior to their decision to assume or reject the lease.
- Debtor tenants of non-residential real property have an initial 120-day period in which they must decide whether they want to assume (e.g. continue performing under), assume and assign, or reject (e.g. breach) a lease. This period may be extended up to 90-days for cause and after such 90-day day extension concludes any further extension must be consented to in writing by the landlord.
- In order to assume a lease, the debtor must cure any existing defaults and provide adequate assurance of its future performance under the lease. To assume and assign a lease, the cure requirement applies, but the debtor must provide adequate assurance of the proposed assignee’s ability to perform under the lease.
- To reject a lease, the debtor must typically only show that the decision was made based on the reasonable exercise of the debtor’s business judgment. Accordingly, it is often very difficult to contest lease rejection.
- In cases where debtors have substantial commercial lease footprints, it is common for debtors to file motions to establish uniform procedures governing assumption and rejection of executory contracts and unexpired leases, as the Debtors have done in the WeWork cases.
- When a lease is assumed, the landlord typically has a prepetition general unsecured claim for any unpaid rent and other costs owing under the lease and may also have an administrative claim to the extent the debtor does not timely pay post-petition rent.
- When a lease is rejected, the landlord typically has a prepetition general unsecured claim for unpaid rent and other costs owing under the lease and a rejection damages claim that is the amount of rent due for the greater of (i) one year or (ii) 15 percent of the remaining lease term (which cannot exceed three years). Rejection damages claims are typically treated as general unsecured claims and recover only a small fraction of the face value of such claim.
We Can Help You
BFKN's Bankruptcy & Creditor Rights Group has robust and practical experience representing landlords and myriad other constituencies in bankruptcies, business reorganizations, and non-judicial workouts of debtors throughout the U.S. We represent certain large national companies in all of their significant bankruptcy disputes, including negotiation of pre- and post-bankruptcy claims, counseling on extending credit to bankruptcy entities, adversary proceedings related to preference and fraudulent transfer actions, assumption of contracts, and critical vendor status. Our Group has represented landlords in many recent large, national chapter 11 bankruptcies, including, the J.C. Penney, Neiman Marcus, Pier 1, Chuck E. Cheese, Shilo Industries, Stein Mart, Buyk, RGN, GNC, and Genesis Care cases.