The Leasing Hotline

A landlord cannot re-let premises to a new tenant if the current tenant's lease is in existence at the time it filed for bankruptcy. In re T.A.C. Group, Inc., d/b/a Frugal Fannie's Fashion Warehouse, U.S. Bkrtcy Ct, Dist. Mass., June 12, 2003.

The tenant and landlord entered into a commercial lease. The parties' lease provided the landlord could immediately terminate the lease if: “Tenant shall at any time during the continuance of this Lease remove, attempt to remove, or manifest, in the judgment of the Landlord, an intention to remove Tenant's goods or property out of or from the Demised Premises except in the ordinary course of business …” That section was the only provision in the lease giving the landlord immediate termination rights without an opportunity and time to cure defaults. The tenant's representative notified the landlord that it intended to retain a liquidating agent to conduct wind-down sales of all its inventory at its four different locations, as it intended to close all its stores and cease operating at the conclusion of the sales. Thereafter, the landlord's attorney sent the tenant a letter terminating the lease. The grounds for the immediate termination were the tenant's announcement of its intention to conduct “going out of business sales” at all of its locations, including the leased premises, which in the landlord's view constituted an intention to remove its goods or property from the leased premises outside the ordinary course of business. Subsequently, the tenant advertised a sale at its store. It did not indicate the sale was a “going out of business sale,” although the tenant concedes that it intended to close the store at the end of the sale. About two weeks after the landlord sent the letter purportedly terminating the lease, the tenant/debtor filed its voluntary Chapter 11 petition and continued to conduct its sale at the premises. The landlord moved to lift the automatic stay, claiming the lease had been terminated before the tenant filed its petition. The court held that the “termination” letter prepared by the landlord's attorney was not an effective pre-petition termination of the lease. It also held that the tenant's “sale” did not entitle the landlord to terminate the lease prior to the date of the Chapter 11 petition. Therefore, the lease existed at the time the tenant filed its Chapter 11 petition and the lease was assumable and assignable by the tenant under the Bankruptcy Code. The landlord was not entitled to a return of the premises to re-let them to a tenant of its choice.