Bankruptcy Lease Sales: Four Basic Rules to Play By

Bankruptcy presents a unique forum for a cash-strapped debtor to sell otherwise unassignable and unprofitable leases to third parties, for immediate cash, and free of liens, certain contract restrictions, certain transaction costs, and future liability. While the bankruptcy arena offers unique opportunities, it poses special risks. The primary players in a bankruptcy lease sale scenario are the debtor, the prospective buyers, and the landlord. A debtor's goal is getting as much value as fast as possible for its creditors. A prospective buyer wants to pay as little as possible, with sufficient due diligence, and have an unassailable sale with whatever lease modifications are necessary for it to remodel and reopen. A landlord's objective is timely lease compliance and a financially and operationally sound buyer. Each party can benefit from following these four basic rules of bankruptcy lease sales.

Rule 1: Know What's for Sale

A debtor must decide initially whether to analyze its portfolio and set out a sale strategy and timeline on its own or to relegate this task to an outside real estate adviser, which is more common. In either event, a document room and prompt access to informed real estate personnel and relevant documents are critical to a smooth, efficient process for both seller and buyer. The debtor must learn the extent and validity of any purported liens, encumbrances or other interests against the real estate so it can notify these affected parties of the proposed sale, resolve related disputes, and preserve the buyer's expectation to a “free and clear” bankruptcy sale. See 11 U.S.C. '363(f). In order to target a proposed sale's net return, the debtor should evaluate the extent of lease defaults because they must be cured promptly on closing under '365(b) of the Bankruptcy Code.

A buyer should bring its title company into the process sooner rather than later to safeguard against missteps. If documents are not available for review, the documents should be excluded from the list of documents to be assumed or assigned. “Review and verify” or refuse to buy, should be the buyer's mantra.

The landlord should promptly evaluate leases subject to sale for clauses vulnerable to modification by bankruptcy court order or to determine if the leases are in default and subject to the prompt cure requirements of the Bankruptcy Code. (See discussion below.) The landlord also should review leases for exclusives and REA restrictions that may have an impact on its other tenants and decide whether it will act to protect these interests or merely inform potentially affected parties.

Rule 2: Be Fast and Flexible

A player's strategy must be as flexible and time sensitive as the bankruptcy sales process itself. Under the Bankruptcy Code, a debtor may sell assets under '363 during a bankruptcy case or pursuant to a confirmed plan of reorganization under '1123, by either private sale or public sale. Section 365(a) is the section specifically governing lease sales. A '365(a) lease sale is referred to as an “assumption” and “assignment.” In addition to realizing value from the lease itself, in the last 10 years some retail debtors have sold their statutory right under '365(a) to choose the assignee of a lease ' their “designation rights” ' to a widening field of end-users, developers, strategic buyers and landlords. The sale of these rights has energized the market and boosted prices. See, e.g., In re Ames Dep't Stores, Inc., 287 B.R. 112 (Bankr. S.D.N.Y. 2002); In re Ernst Home Ctr., Inc., 209 B.R. 974 (Bankr. W.D. Wash. 1997), appeal dismissed sub nom. B.C. Brickyard Assoc. v. Ernst Home Ctr., Inc. (In re Ernst Home Ctr., Inc.), 221 B.R. 243 (9th Cir. B.A.P. 1998).

In a private sale, the debtor enters into a purchase agreement, gives notice to parties in interest of their right to object and seeks court approval. The debtor has two public sale options. The debtor can enter into a purchase agreement, just as in a private sale, give notice and set a deadline for other interested parties to submit competing higher or better offers. The debtor's initial offer is presented to the court for its approval, subject to overbid and selection of the highest and best offer. In an auction, after obtaining prior approval of auction procedures and sale terms, a debtor may conduct a sale through a sealed bid or live auction of assets, at the conclusion of which a sale is awarded to the highest and best bidder, subject to court approval and objections of parties in interest.

Section 1123(b)(2) authorizes the sale of leases under a plan subject to the protections of '365. This scenario typically involves a private sale in which the debtor and buyer negotiate a purchase agreement that is incorporated into the plan. However, a plan could provide for a post-confirmation auction. Because an agreed lease termination or bilateral termination under '1146(c) of the Bankruptcy Code exempts transactions “under a plan” from “stamp tax or similar tax,” sale plans can also save the parties significant transaction costs. There is disagreement between the bankruptcy courts and appellate courts as to when a sale qualifies for the exemption. Compare In re Linc Capital, Inc., 280 B.R. 640, 646-47 (Bankr. N.D. Ill. 2002) (rejecting textually based analysis that sale must be provided for “under a plan”), and In re Permar Provisions, Inc., 79 B.R. 530, 534 (Bankr. E.D.N.Y. 1987) (same), with Baltimore County v. Hechinger Liquidation Trust (In re Hechinger Inv. Co. of Del., Inc.), 335 F.3d 243, 257 (3rd Cir. 2003), following the reasoning of the Fourth Circuit in NVR Homes, Inc. v. Clerks of the Circuit Courts (In re NVR, LP), 189 F.3d 442, 457-58 (4th Cir. 1999), cert. denied, 528 U.S. 1117 (2000) (strictly construing “under a plan” to limit exemption to sales provided for in a plan and to exclude pre-plan confirmation transfers).

The loose statutory framework gives a debtor great freedom to structure the sale process. A debtor typically seeks prior court approval of its proposed bid and auction procedures to minimize future objections to the process, reserving to itself discretion whether to proceed by individual or bulk bid or in any combination or in any order and when to withdraw a property or to announce a final accepted bid. Because courts generally strictly enforce court-approved bid procedures, prospective bidders should scrutinize proposed procedures carefully and get their objections on the record before court approval. If bulk or package bids are possible, bidders may ask the court to require the debtor to offer leases individually in order to level the playing field, although debtors are usually able to defeat this request by arguing successfully that it encourages “cherry picking” and may not enhance the return on less valuable properties that a bulk buyer will include in a package in order to get the gems, but will drop if the package is broken up.

No one should forget that a bankruptcy sale is about a quick return. Courts disagree as to whether and under what circumstances a “final bid” can be trumped by an “upset bid” made after court-approved bidding ends but prior to final court approval of a sale. See Corporate Assets, Inc. v. Paloian, 368 F.3d 761, 769-71 (7th Cir. 2004) and the authorities cited therein for a discussion on a sliding scale test reconciling the competing interests of maximizing creditor recovery with preserving the finality and integrity of the bid and auction process. All potential bidders should evaluate prior to the start of bidding whether they want to create strategic alliances in order to be positioned to offer the highest price at all times. However, bidders should eliminate as many contingencies as possible, such as financing and additional due diligence, because the certainty and speed of a non-contingent offer ' even for less money ' may be a better offer in the debtor's eyes than a contingent bid for more dollars.

Combination bidders should be aware that '365(n) prohibits collusion in the bidding process and allows a sale to be undone if the price was controlled by an agreement among bidders and permits the excess value over the purchase price and punitive damages to be recovered from any party to such an agreement. A bidder can take comfort that only agreements that control the sales price by limiting it are prohibited, not agreements that create competition and boost the ultimate purchase price, a favored bankruptcy result. See 11 U.S.C. '363(n); Lonestar Indus., Inc. v. Compania Naviera Perez Companc (In re New York Trap Rock Corp.), 42 F.3d 747, 752-53 (2nd Cir. 1994).

Rule 3: Get What You Were Promised

What contract rights can the parties insist on in a bankruptcy sale? Unquestionably a tension exists in the Bankruptcy Code between contract rights essential to the bargain and those modifiable to promote sales.

Section 365(f)(2) requires that a proposed assignee provide “adequate assurance of future performance” prior to lease assignment. See 11 U.S.C. '365(f)(2). Recognizing the synergistic nature of shopping centers, Congress gave special protections exclusively to shopping center leases at '365(b)(3), which defines “adequate assurance” to include adequate assurance of an assignee's ability to pay rent and of the assignee's similar financial condition and operating performance to that of the assignor, and that the assignment is subject to lease provisions, such as radius, location, use, or exclusivity, and will not breach any such provision in any other document relating to the shopping center. Although the Bankruptcy Code is silent on what adequate assurance is for non-shopping center leases, an assignee's ability to perform lease obligations is an almost universal given. See EBG Midtown S Corp. v. McLaren/Hart Envtl. Eng'g Corp. (In re Sanshoe Worldwide Corp.), 139 B.R. 585, 592 (S.D.N.Y. 1992) (“[T]the 'chief determinant' of adequate assurance is whether rent will be paid.”) (citations omitted). When in doubt about financial or operating performance, a landlord should ask for security as a condition of sale. See, eg, The Casual Male Corp., 120 B.R. 256, 264 (Bankr. D. Mass. 1990) (assignee offered to deposit 6 months of rent in advance); In re Alipat, Inc., 36 B.R. 274, 277-78 (Bankr. E.D. Mo. 1984) (a letter of credit may be adequate assurance).

Armed with the protections of '365(b)(3), a shopping center landlord should object to proposed modifications that violate lease provisions, such as the use clause and exclusives (which most courts recognize as sacrosanct), and sales that undermine the synergistic nature of the center through inappropriate tenant mix (array of tenants in center) or balance (location of stores in center). See In re Tech Hifi Inc., 49 B.R. 876, 879-80 (Bankr. D. Mass. 1985) (assignment must be subject to use and exclusivity provisions); In re Federated Dep't Stores, Inc., 135 B.R. 941, 943-44 (Bankr. S.D. Ohio 1991) (denying assignment since it would shift the “image and esthetics” of the mall which “translate very quickly into dollars … “).

On the other hand, '365(f) authorizes a debtor, with certain exceptions and subject to the landlord protections of '365(b), to sell leases to third parties, notwithstanding any provision “that prohibits, restricts or conditions the assignment of such contract or lease,” often called “anti-assignment provisions.” Today, '365(f) is invoked to sell leases, despite express prohibitions against assignment and to override continuous operation clauses in order to allow locations to “go dark” during marketing and remodeling, to modify alterations clauses to permit nonstructural changes consistent with the buyer's prototype ' although usually not beyond the original store blueprint – and, in some instances, even to negate subdivision prohibitions to allow subleasing, based on the argument that, if enforceable, these provisions might hinder a lease's salability. See, eg, In re Rickels Home Ctrs., Inc., 240 B.R. 826, 831 (D. Del. 1998), appeal dismissed, 209 F.3d 291 (3rd Cir.), cert. denied, 531 U.S. 873 (2000) (alteration and subdivision prohibitions were “essentially nuisance provisions” which a court could negate).

In general, a buyer will have to live with use clauses and exclusives, as well as structural alteration prohibitions that prevent inappropriately shifting risk of loss to the landlord. See, eg, Cong. Fin. Corp. v. West Town Ctr. (In re Trak Auto Corp.), 367 F.3d 237, 241-42 (4th Cir. 2004) (holding use clause strictly enforceable); Worthington v. General Motors Corp. (In re Claremont Acquisition Corp.), 113 F.3d 1029, 1034 (9th Cir. 1997) (material and economically significant lease clauses cannot be altered by the court); In re Joshua Slocum, Ltd., 922 F.2d 1081, 1090 (3rd Cir. 1990) (court's authority to waive strict compliance with lease provisions is limited to insubstantial disruptions and breaches). But see Rickels Home Ctrs., Inc., supra, 240 B.R. at 831 (where full compliance is impossible or a restriction is a de facto anti-assignment provision, it will be stricken). Thus, the buyer should capitalize on the unique opportunity the Bankruptcy Code offers to request lease modifications it deems necessary to remodel, open and operate successfully. The landlord should resist encroachments on lease terms not expressly sanctioned by the Bankruptcy Code and try to keep modifications to an absolute minimum.

While a landlord may not be able to enforce all lease terms strictly after a bankruptcy sale, it can insist on getting the money due under the lease at closing. Sections 365(b)(1) and 365(f) prevent the assignment of defaulted leases, without a prompt cure or adequate assurance of prompt cure. The landlord can recover defaulted contract amounts, including all elements of rent (base and percentage), common area maintenance, insurance, marketing fees, and other operating expenses such as utilities, as well as “pass-throughs,” such as the debtor's duty to pay its share of real estate taxes. Although the cure requirement is also applicable to nonmonetary defaults, such as maintenance and repair, the type and timing of nonmonetary cure varies considerably. See, eg, In re Vitanza, No. 98-19611DWS, 1998 WL 808629, at *19 (Bankr. E.D. Pa. Nov. 13, 1998) (while landlord argued debtor had to fix electrical system and plumbing problems as part of pre-assumption cure, the court held that debtor's repair of identified defects and hiring of an electrician and plumber to do repairs on a set schedule satisfied debtor's duty to cure nonmonetary defaults). While the buyer should use the bankruptcy sale to gets its best deal, the landlord should use the lease closing to clean up the account and property and get its promised bargain.

Rule 4: Make a Clean Exit

When a seller assigns a lease outside of bankruptcy, it generally remains liable along with the assignee for lease obligations for the balance of the term, absent an express landlord release. In bankruptcy, a seller is absolved of all future liability on closing under '365(k). Because the debtor is released of all lease obligations on prompt cure and may be totally liquidating, the buyer and landlord should clarify prior to closing who is responsible for what obligations going forward under the lease.

The landlord should make sure that sufficient monies for cures are paid or escrowed until disputes are finally resolved and that all pass-throughs and year-end reconciliations have been allocated between seller and buyer so the landlord is not left inadvertently on the hook for sums that accrued on the debtor's watch, but were not technically defaulted obligations that were therefore subject to cure. The buyer should insist that the debtor seek a finding in the sale order that it “purchased in good faith” within the meaning '363(m): This finding insulates the validity of the sale from reversal or modification on appeal, absent a stay, and delivers desired finality to the buyer. See 11 U.S.C. '363(m).

Each party should insist on its full statutory rights pre-closing. In the end, seller, buyer and landlord ideally shall each get in and out of the process with no future commitments to the bankruptcy estate or its creditors, or at the least, with future lease rights and obligations clearly defined.

Bankruptcy presents a unique forum for a cash-strapped debtor to sell otherwise unassignable and unprofitable leases to third parties, for immediate cash, and free of liens, certain contract restrictions, certain transaction costs, and future liability. While the bankruptcy arena offers unique opportunities, it poses special risks. The primary players in a bankruptcy lease sale scenario are the debtor, the prospective buyers, and the landlord. A debtor's goal is getting as much value as fast as possible for its creditors. A prospective buyer wants to pay as little as possible, with sufficient due diligence, and have an unassailable sale with whatever lease modifications are necessary for it to remodel and reopen. A landlord's objective is timely lease compliance and a financially and operationally sound buyer. Each party can benefit from following these four basic rules of bankruptcy lease sales.

Rule 1: Know What's for Sale

A debtor must decide initially whether to analyze its portfolio and set out a sale strategy and timeline on its own or to relegate this task to an outside real estate adviser, which is more common. In either event, a document room and prompt access to informed real estate personnel and relevant documents are critical to a smooth, efficient process for both seller and buyer. The debtor must learn the extent and validity of any purported liens, encumbrances or other interests against the real estate so it can notify these affected parties of the proposed sale, resolve related disputes, and preserve the buyer's expectation to a “free and clear” bankruptcy sale. See 11 U.S.C. '363(f). In order to target a proposed sale's net return, the debtor should evaluate the extent of lease defaults because they must be cured promptly on closing under '365(b) of the Bankruptcy Code.

A buyer should bring its title company into the process sooner rather than later to safeguard against missteps. If documents are not available for review, the documents should be excluded from the list of documents to be assumed or assigned. “Review and verify” or refuse to buy, should be the buyer's mantra.

The landlord should promptly evaluate leases subject to sale for clauses vulnerable to modification by bankruptcy court order or to determine if the leases are in default and subject to the prompt cure requirements of the Bankruptcy Code. (See discussion below.) The landlord also should review leases for exclusives and REA restrictions that may have an impact on its other tenants and decide whether it will act to protect these interests or merely inform potentially affected parties.

Rule 2: Be Fast and Flexible

A player's strategy must be as flexible and time sensitive as the bankruptcy sales process itself. Under the Bankruptcy Code, a debtor may sell assets under '363 during a bankruptcy case or pursuant to a confirmed plan of reorganization under '1123, by either private sale or public sale. Section 365(a) is the section specifically governing lease sales. A '365(a) lease sale is referred to as an “assumption” and “assignment.” In addition to realizing value from the lease itself, in the last 10 years some retail debtors have sold their statutory right under '365(a) to choose the assignee of a lease ' their “designation rights” ' to a widening field of end-users, developers, strategic buyers and landlords. The sale of these rights has energized the market and boosted prices. See, e.g., In re Ames Dep't Stores, Inc., 287 B.R. 112 (Bankr. S.D.N.Y. 2002); In re Ernst Home Ctr., Inc., 209 B.R. 974 (Bankr. W.D. Wash. 1997), appeal dismissed sub nom. B.C. Brickyard Assoc. v. Ernst Home Ctr., Inc. (In re Ernst Home Ctr., Inc.), 221 B.R. 243 (9th Cir. B.A.P. 1998).

In a private sale, the debtor enters into a purchase agreement, gives notice to parties in interest of their right to object and seeks court approval. The debtor has two public sale options. The debtor can enter into a purchase agreement, just as in a private sale, give notice and set a deadline for other interested parties to submit competing higher or better offers. The debtor's initial offer is presented to the court for its approval, subject to overbid and selection of the highest and best offer. In an auction, after obtaining prior approval of auction procedures and sale terms, a debtor may conduct a sale through a sealed bid or live auction of assets, at the conclusion of which a sale is awarded to the highest and best bidder, subject to court approval and objections of parties in interest.

Section 1123(b)(2) authorizes the sale of leases under a plan subject to the protections of '365. This scenario typically involves a private sale in which the debtor and buyer negotiate a purchase agreement that is incorporated into the plan. However, a plan could provide for a post-confirmation auction. Because an agreed lease termination or bilateral termination under '1146(c) of the Bankruptcy Code exempts transactions “under a plan” from “stamp tax or similar tax,” sale plans can also save the parties significant transaction costs. There is disagreement between the bankruptcy courts and appellate courts as to when a sale qualifies for the exemption. Compare In re Linc Capital, Inc., 280 B.R. 640, 646-47 (Bankr. N.D. Ill. 2002) (rejecting textually based analysis that sale must be provided for “under a plan”), and In re Permar Provisions, Inc., 79 B.R. 530, 534 (Bankr. E.D.N.Y. 1987) (same), with Baltimore County v. Hechinger Liquidation Trust (In re Hechinger Inv. Co. of Del., Inc.), 335 F.3d 243, 257 (3rd Cir. 2003), following the reasoning of the Fourth Circuit in NVR Homes, Inc. v. Clerks of the Circuit Courts (In re NVR, LP), 189 F.3d 442, 457-58 (4th Cir. 1999), cert. denied , 528 U.S. 1117 (2000) (strictly construing “under a plan” to limit exemption to sales provided for in a plan and to exclude pre-plan confirmation transfers).

The loose statutory framework gives a debtor great freedom to structure the sale process. A debtor typically seeks prior court approval of its proposed bid and auction procedures to minimize future objections to the process, reserving to itself discretion whether to proceed by individual or bulk bid or in any combination or in any order and when to withdraw a property or to announce a final accepted bid. Because courts generally strictly enforce court-approved bid procedures, prospective bidders should scrutinize proposed procedures carefully and get their objections on the record before court approval. If bulk or package bids are possible, bidders may ask the court to require the debtor to offer leases individually in order to level the playing field, although debtors are usually able to defeat this request by arguing successfully that it encourages “cherry picking” and may not enhance the return on less valuable properties that a bulk buyer will include in a package in order to get the gems, but will drop if the package is broken up.

No one should forget that a bankruptcy sale is about a quick return. Courts disagree as to whether and under what circumstances a “final bid” can be trumped by an “upset bid” made after court-approved bidding ends but prior to final court approval of a sale. See Corporate Assets, Inc. v. Paloian, 368 F.3d 761, 769-71 (7th Cir. 2004) and the authorities cited therein for a discussion on a sliding scale test reconciling the competing interests of maximizing creditor recovery with preserving the finality and integrity of the bid and auction process. All potential bidders should evaluate prior to the start of bidding whether they want to create strategic alliances in order to be positioned to offer the highest price at all times. However, bidders should eliminate as many contingencies as possible, such as financing and additional due diligence, because the certainty and speed of a non-contingent offer ' even for less money ' may be a better offer in the debtor's eyes than a contingent bid for more dollars.

Combination bidders should be aware that '365(n) prohibits collusion in the bidding process and allows a sale to be undone if the price was controlled by an agreement among bidders and permits the excess value over the purchase price and punitive damages to be recovered from any party to such an agreement. A bidder can take comfort that only agreements that control the sales price by limiting it are prohibited, not agreements that create competition and boost the ultimate purchase price, a favored bankruptcy result. See 11 U.S.C. '363(n); Lonestar Indus., Inc. v. Compania Naviera Perez Companc (In re New York Trap Rock Corp.), 42 F.3d 747, 752-53 (2nd Cir. 1994).

Rule 3: Get What You Were Promised

What contract rights can the parties insist on in a bankruptcy sale? Unquestionably a tension exists in the Bankruptcy Code between contract rights essential to the bargain and those modifiable to promote sales.

Section 365(f)(2) requires that a proposed assignee provide “adequate assurance of future performance” prior to lease assignment. See 11 U.S.C. '365(f)(2). Recognizing the synergistic nature of shopping centers, Congress gave special protections exclusively to shopping center leases at '365(b)(3), which defines “adequate assurance” to include adequate assurance of an assignee's ability to pay rent and of the assignee's similar financial condition and operating performance to that of the assignor, and that the assignment is subject to lease provisions, such as radius, location, use, or exclusivity, and will not breach any such provision in any other document relating to the shopping center. Although the Bankruptcy Code is silent on what adequate assurance is for non-shopping center leases, an assignee's ability to perform lease obligations is an almost universal given. See EBG Midtown S Corp. v. McLaren/Hart Envtl. Eng'g Corp. (In re Sanshoe Worldwide Corp.), 139 B.R. 585, 592 (S.D.N.Y. 1992) (“[T]the 'chief determinant' of adequate assurance is whether rent will be paid.”) (citations omitted). When in doubt about financial or operating performance, a landlord should ask for security as a condition of sale. See, eg, The Casual Male Corp., 120 B.R. 256, 264 (Bankr. D. Mass. 1990) (assignee offered to deposit 6 months of rent in advance); In re Alipat, Inc., 36 B.R. 274, 277-78 (Bankr. E.D. Mo. 1984) (a letter of credit may be adequate assurance).

Armed with the protections of '365(b)(3), a shopping center landlord should object to proposed modifications that violate lease provisions, such as the use clause and exclusives (which most courts recognize as sacrosanct), and sales that undermine the synergistic nature of the center through inappropriate tenant mix (array of tenants in center) or balance (location of stores in center). See In re Tech Hifi Inc., 49 B.R. 876, 879-80 (Bankr. D. Mass. 1985) (assignment must be subject to use and exclusivity provisions); In re Federated Dep't Stores, Inc., 135 B.R. 941, 943-44 (Bankr. S.D. Ohio 1991) (denying assignment since it would shift the “image and esthetics” of the mall which “translate very quickly into dollars … “).

On the other hand, '365(f) authorizes a debtor, with certain exceptions and subject to the landlord protections of '365(b), to sell leases to third parties, notwithstanding any provision “that prohibits, restricts or conditions the assignment of such contract or lease,” often called “anti-assignment provisions.” Today, '365(f) is invoked to sell leases, despite express prohibitions against assignment and to override continuous operation clauses in order to allow locations to “go dark” during marketing and remodeling, to modify alterations clauses to permit nonstructural changes consistent with the buyer's prototype ' although usually not beyond the original store blueprint – and, in some instances, even to negate subdivision prohibitions to allow subleasing, based on the argument that, if enforceable, these provisions might hinder a lease's salability. See, eg, In re Rickels Home Ctrs., Inc., 240 B.R. 826, 831 (D. Del. 1998), appeal dismissed, 209 F.3d 291 (3rd Cir.), cert. denied, 531 U.S. 873 (2000) (alteration and subdivision prohibitions were “essentially nuisance provisions” which a court could negate).

In general, a buyer will have to live with use clauses and exclusives, as well as structural alteration prohibitions that prevent inappropriately shifting risk of loss to the landlord. See, eg, Cong. Fin. Corp. v. West Town Ctr. (In re Trak Auto Corp.), 367 F.3d 237, 241-42 (4th Cir. 2004) (holding use clause strictly enforceable); Worthington v. General Motors Corp. (In re Claremont Acquisition Corp.), 113 F.3d 1029, 1034 (9th Cir. 1997) (material and economically significant lease clauses cannot be altered by the court); In re Joshua Slocum, Ltd., 922 F.2d 1081, 1090 (3rd Cir. 1990) (court's authority to waive strict compliance with lease provisions is limited to insubstantial disruptions and breaches). But see Rickels Home Ctrs., Inc., supra, 240 B.R. at 831 (where full compliance is impossible or a restriction is a de facto anti-assignment provision, it will be stricken). Thus, the buyer should capitalize on the unique opportunity the Bankruptcy Code offers to request lease modifications it deems necessary to remodel, open and operate successfully. The landlord should resist encroachments on lease terms not expressly sanctioned by the Bankruptcy Code and try to keep modifications to an absolute minimum.

While a landlord may not be able to enforce all lease terms strictly after a bankruptcy sale, it can insist on getting the money due under the lease at closing. Sections 365(b)(1) and 365(f) prevent the assignment of defaulted leases, without a prompt cure or adequate assurance of prompt cure. The landlord can recover defaulted contract amounts, including all elements of rent (base and percentage), common area maintenance, insurance, marketing fees, and other operating expenses such as utilities, as well as “pass-throughs,” such as the debtor's duty to pay its share of real estate taxes. Although the cure requirement is also applicable to nonmonetary defaults, such as maintenance and repair, the type and timing of nonmonetary cure varies considerably. See, eg, In re Vitanza, No. 98-19611DWS, 1998 WL 808629, at *19 (Bankr. E.D. Pa. Nov. 13, 1998) (while landlord argued debtor had to fix electrical system and plumbing problems as part of pre-assumption cure, the court held that debtor's repair of identified defects and hiring of an electrician and plumber to do repairs on a set schedule satisfied debtor's duty to cure nonmonetary defaults). While the buyer should use the bankruptcy sale to gets its best deal, the landlord should use the lease closing to clean up the account and property and get its promised bargain.

Rule 4: Make a Clean Exit

When a seller assigns a lease outside of bankruptcy, it generally remains liable along with the assignee for lease obligations for the balance of the term, absent an express landlord release. In bankruptcy, a seller is absolved of all future liability on closing under '365(k). Because the debtor is released of all lease obligations on prompt cure and may be totally liquidating, the buyer and landlord should clarify prior to closing who is responsible for what obligations going forward under the lease.

The landlord should make sure that sufficient monies for cures are paid or escrowed until disputes are finally resolved and that all pass-throughs and year-end reconciliations have been allocated between seller and buyer so the landlord is not left inadvertently on the hook for sums that accrued on the debtor's watch, but were not technically defaulted obligations that were therefore subject to cure. The buyer should insist that the debtor seek a finding in the sale order that it “purchased in good faith” within the meaning '363(m): This finding insulates the validity of the sale from reversal or modification on appeal, absent a stay, and delivers desired finality to the buyer. See 11 U.S.C. '363(m).

Each party should insist on its full statutory rights pre-closing. In the end, seller, buyer and landlord ideally shall each get in and out of the process with no future commitments to the bankruptcy estate or its creditors, or at the least, with future lease rights and obligations clearly defined.