BANKRUPTCY COURT REQUIRES TENANT TO CURE LEASE AND GIVE ADEQUATE ASSURANCES OF FUTURE PERFORMANCE
BANKRUPTCY COURT REQUIRES TENANT TO CURE LEASE AND GIVE ADEQUATE ASSURANCES OF FUTURE PERFORMANCE
When a tenant files bankruptcy, the tenant has a short period of time to assume the lease but must cure any defaults in payment and offer to the landlord adequate assurances of future good performance. In the new case of In re Hawkeye Entertainment, LLC, the landlord and tenant battled through bankruptcy court and appeals to the U.S. District Court and then on to the Ninth Circuit (that’s a lot of attorneys fees accumulated). The 9th Cir. affirmed the holdings of the underlying courts that, over the objections of the landlord, allowed the debtor tenant to assume the lease. But, the case is important to provide notice to both landlords and tenants of the requirement of bankruptcy tenant(s) to cure material and immaterial defaults, compensate the landlord for any loss (i.e. attorney fees) and give some assurance of future performance. What is adequate for future performance? A promise? A higher security deposit? A letter of credit? Those details will vary by circumstance, case and judge.
The economic cycle seems to point to more bankruptcies. Landlords should immediately get prepared to be able to describe the tenant’s default and quantify damages and explain why the default cannot be cured (if that is the case) but if curable, be ready to specify the cure required (and do this even before the bankruptcy, if possible). The issue in the Hawkeye bankruptcy was that the landlord did not explain and rationalize these things. Instead, the landlord appeared to simply want to get rid of a tenant that had an under-market lease, even though defaults were based on failure to upkeep the premises, failure to provide estoppel certificates, etc.
The 9th Circuit ruling held that a.) any default is sufficient to require tenant cure and provide adequate assurances in order to assume a lease in default and b.) because the landlord did not articulate adequate performance terms more than the tenant’s promise to abide by the terms of the lease, the assumption allowed by the underlying bankruptcy court was ok. The underlying bankruptcy court had said after a year of discovery and during trial that the alleged defaults “appeared manufactured, and minor, and made-up, sometimes.” The bankruptcy judge wrongly placed a “material default” requirement on the landlord: the bankruptcy court held that in order to be a “default” for purposes of Section 365 (of the bankruptcy code), the default must be material under the applicable state law. In other words, the default must be serious enough that a landlord would be entitled to terminate the lease. The 9th Circuit let stand the tenant’s assumption of the lease, noting that there is no materiality requirement in Section 365.
Here at Epps & Coulson, LLP, we do a lot of bankruptcy and landlord/tenant work. We help clients in commercial landlord/tenant disputes, financial restructurings, workouts, the refinancing of debt, creditor-debtor litigation, asset dispositions and recapitalizations, reorganizations, and liquidations, both in and outside of formal proceedings. We understand how bankruptcies may be confusing. We are available to advise and help you implement policies to protect you. Contact Dawn at: dcoulson@eppscoulson.com or Tamar at Tterzian@eppscoulson.com.
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