When negotiating leases, landlords may not realize that if a tenant goes bankrupt, they may not be able to enforce important lease provisions against a tenant’s successor to the lease. Those could include restrictions on use and alterations, requirements that a store stay open, and obligations to share profits on rent charged to the new occupant. To make things worse for landlords, investors are buying these leases in bankruptcy auctions and calling the shots on the use of the leased space.
Landlords have suffered these indignities in a variety of recent retail bankruptcies, including Rickel Home Centers, Montgomery Ward, Kmart and Service Merchandise. A court may authorize auctioning off a package of the debtor’s leases in many shopping centers. Therefore, as a practical matter, the landlord interested only in taking back a lease in its own center may not even be able to compete for its own store.
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