As retailers and landlords continue to have difficult negotiations over rent payments while stores are closed during the coronavirus pandemic, the conflict is coming into clearer view in the handful of retail bankruptcies already under way.
On Tuesday, the Virginia federal court overseeing the Pier 1 Imports Inc. bankruptcy agreed to extend its rent deferment period, even as landlords objected that that would go past the 60 day rent-deferral permitted by the bankruptcy code. Pier 1 filed for bankruptcy on Feb. 17.
The development points to a new dynamic in these proceedings caused by the pandemic. The bankruptcy process is meant to give financially troubled companies some relief by allowing them to avoid enforcement actions for unpaid debt from before their bankruptcy, and to renegotiate with landlords and vendors. But it also generally requires companies to pay the expenses they incur during the bankruptcy. The COVID-19 era has provided more room for exceptions to that norm, giving retailers some additional breathing room while their stores are closed to customers, but pushing landlords to complain about being treated unfairly in the process.
“Landlords are in the untenable position of having to serve as both involuntary lenders and involuntary bailees for the debtors,” a group of Pier 1 landlords argued in a filing on Monday, a day before the hearing in the case in which the court ruled in favor of Pier 1’s motion for a further extension.
“While landlords understand the debtors’ plight amid the COVID-19 crisis, it is unreasonable and unwarranted to force the landlords into the position of involuntary, unsecured, interest-free lenders to these cases, while the debtors are permitted the continued use and occupancy of the premises rent-free,” they said.
True Religion, which filed for bankruptcy earlier this month and made a similar request to defer rent payments, appears to still be addressing the issue with landlords. A hearing originally scheduled on the issue this week has been pushed to next month, according to court documents.
But the emerging conflict shows the more complicated back-and-forth between retailers in bankruptcy and their main creditors, including secured lenders, landlords.
Secured lenders are usually protected by the liens they have on assets to secure their loans. But landlords, who would normally have an administrative claim for the rent they are owed after their retail tenant’s bankruptcy filing, may be left more vulnerable, attorneys said.
“The problem is that the landlords will be put at a disadvantage to other constituencies such as the lenders and the professionals,” said Walter Curchack, chair of Loeb & Loeb LLP’s restructuring and bankruptcy practice. Curchack is not involved in the ongoing retail bankruptcies, and spoke generally.
Nonetheless, courts may be inclined to grant this type of relief to retailers, when it seems existential. It may essentially act as a kind of temporary restraining order to keep the bankrupt retailer on life support for as long as possible, attorneys said.
“It becomes an issue if the lenders become a little too aggressive on their own behalf, or the landlords do, and try to create a win-lose situation rather than a lose-lose situation where everyone loses a little bit, which is the way that bankruptcy is designed to work,” said Curchack.
Larger chains like Neiman Marcus Group and J.C. Penney Co. Inc., which are both also on bankruptcy watch, could potentially fare better during the proceedings as they likely have more assets, more liquidity, and more access to capital markets, which means that if they file for bankruptcy protection, they’re more likely to do so with sufficient financing to carry them through the proceedings.
But at the same time, the bankruptcy of larger retailers may also mean more risk. Larger retailers are more likely to be in shopping malls, bringing a different dynamic to a bankruptcy setting than with regular landlords, attorneys said.
“The larger stores with greater rent will have a more significant impact on the landlords and their lenders if concessions are required in order to get through the pandemic,” said Joel Shapiro of Blank Rome LLP.
“This also means the unpaid or deferred post-petition rent will ramp up much quicker, and possibly cause a strain on the chapter proceeding that will make it more difficult to manage and come out the other side,” he said.