Judge Questions Whether Lease Language or Bankruptcy Law Applies

Facts: Commercial property owner IMI Mount Pleasant LLC wanted to prevent its bankrupt tenant, Tweeter Home Entertainment, from assigning its lease to another tenant, Newco. The lease between Tweeter and IMI states that the tenant may assign the lease to any parent, subsidiary, or affiliate of Tweeter, or to any party that has acquired all of Tweeter's stores in South Carolina. At the time of the dispute over the assignment, Newco owned all three of Tweeter's stores in South Carolina.

Decision: The U.S. Bankruptcy Court for the District of Delaware did not rule in favor of either party. Rather, the judge asked the parties to submit arguments supporting their opinions on the relevant issue in the case, which he had never before addressed: When there's a dispute over whether a bankrupt commercial tenant may assign its lease, does the lease language relevant to assignments apply, or do the provisions of the Bankruptcy Code relevant to assignments apply?

Reasoning: “The judge believes that if the court were to consider the lease language alone, the tenant is entitled to assign the lease,” says Bob Eisenbach III, a partner in the Cooley Godward Kronish Bankruptcy & Restructuring practice group. However, explains Eisenbach, the Bankruptcy Code imposes several requirements on the assignments of shopping center-space leases by tenants in bankruptcy. Among other things, the proposed tenant's financial condition must be adequate and the proposed tenant's business can't disrupt the shopping center's tenant mix.

“For instance, if a shopping center owner promised its Whole Foods tenant that it would be the only establishment selling food in the building, the proposed tenant couldn't be another grocery store,” Eisenbach says.

Bottom line: If only the lease language applies, the tenant could assign its lease and the court wouldn't have to assess whether the prospective tenant satisfies any of the Bankruptcy Code's requirements.

• Tweeter Home Entertainment Group, Inc., et al., October 2007.

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