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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.
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