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In the Spotlight: Retail Tenant Bankruptcies

By Brian D. Huben

The Scenario: Shopping center landlords know it all too well. A prospective tenant expresses interest in leasing space at a shopping center. The landlord considers the prospective tenant a good addition to the tenant mix and balance at the shopping center. Negotiations follow. The tenant wants to build out its prototypical store. A letter of intent is signed. More negotiations take place. Multiple drafts of the lease are circulated. Perhaps, to close the deal, the landlord decides to give the tenant a construction allowance to offset the tenant's costs of building out the space at the shopping center. The lease is executed. Designs and plans are exchanged and approved. The tenant hires and executes a construction agreement with a general contractor. Permits are pulled. Construction begins. Draws are paid to the general contractor.

'And then ' the tenant files for bankruptcy. The work stops, the payments stop, and recordation of the mechanics' liens starts. In many states, even though the landlord has no contractual relationship with the general contractor (or, for that matter, the subcontractors, materialmen, or suppliers), the contractors who worked on construction of the tenant's store nonetheless have a right to record a lien against the landlord's fee simple interest in the property to secure payment for labor or materials supplied as part of the construction, or work of improvement. In this scenario, what remedies are available to a landlord?

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