When a tenant in a shopping center files for bankruptcy, Section 365(b)(3) of the Bankruptcy Code provides special protections for landlords that go beyond those available for other commercial leases. These protections require any potential assignee of a shopping center lease to comply with exclusivity and use provisions, maintain the existing tenant mix, and meet financial standards similar to the original tenant. As a result, landlords can block assignments to undesirable tenants, but buyers must carefully review lease terms and co-tenant agreements before bidding on a debtor’s lease.

Not all commercial leases qualify as “shopping center” leases, and courts use a fact-intensive approach to determine eligibility. Factors include whether there is a single landlord, a master lease, commercial retail tenants, and a common parking lot. The Bankruptcy Code also expands the requirements for “adequate assurance of future performance,” including financial condition, percentage rent, and compliance with radius, location, use, and exclusivity provisions. Disputes often arise over seemingly simple lease terms, such as whether a deli violates a grocery store’s exclusivity clause.

Ultimately, Section 365(b)(3) protections can create complex hurdles for both landlords and buyers. While these rules help landlords preserve the character and balance of their shopping centers, they are not absolute and may be challenged in court. Buyers should anticipate these issues by examining all relevant leases and preparing to argue why assignment does not violate the Bankruptcy Code. In this nuanced area of bankruptcy law, experienced counsel is essential to navigate potential obstacles and ensure a successful transaction. Read full article here.