Prevent Bankrupt Tenant from Picking Assignee that Disturbs Your Tenant Mix

February 1, 2004

With tenant bankruptcies on the rise, you need to take every step possible to protect yourself—especially since the federal bankruptcy code lets bankrupt tenants assign their leases. If you're a shopping center owner, the bankruptcy code gives you more assignment protection than it gives owners of other types of properties because it protects you from an assignment that disrupts the tenant mix at your center. But you want to put yourself in the best position to benefit from this protection.

With tenant bankruptcies on the rise, you need to take every step possible to protect yourself—especially since the federal bankruptcy code lets bankrupt tenants assign their leases. If you're a shopping center owner, the bankruptcy code gives you more assignment protection than it gives owners of other types of properties because it protects you from an assignment that disrupts the tenant mix at your center. But you want to put yourself in the best position to benefit from this protection.

To help you do that, here are two strategies suggested by Los Angeles attorney Alec G. Nedelman and New York City attorney Michael P. Richman. Each strategy highlights the importance of the tenant mix. Add both to your lease.

Influence Bankruptcy Court in Your Favor

Use both of the following strategies to help convince a bankruptcy court to interpret the bankruptcy code in your favor so that you can properly protect your tenant mix.

Strategy #1: Add tenant's acknowledgment to lease. Require the tenant to acknowledge in the lease that the tenant mix is important to you and to the operation of the center, says Richman. And have the tenant agree that it won't assign the lease to anyone that would negatively affect the tenant mix at your center, he adds.

To do this, add the following language to your lease: Get this Model Lease Language online: enter KEY # CLLI0006

Model Lease Language

Tenant hereby acknowledges that the tenant mix of the Shopping Center is important to Landlord and to the operation of the Shopping Center. Accordingly, Tenant agrees that it shall not assign the Lease to any party that would have an adverse impact on the tenant mix in the Shopping Center.

Strategy #2: Add condition to assignment clause. Also, point out in the lease that you can deny your consent to an assignment if the proposed assignee would negatively affect the tenant mix at your center, advises Nedelman.

To do this, add the following language to the assignment clause where it lists conditions for reasonably denying consent, says Nedelman:

Model Lease Language

(x) The proposed use to be made of the Premises would have an adverse impact on the tenant mix in the Shopping Center.

Practical Pointer: Are these strategies certain to influence the bankruptcy court's decision on who's an acceptable assignee? There's no guarantee, admits Richman, but it's still better to include these strategies in your lease than not to.

CLLI Sources

Alec G. Nedelman, Esq.: Partner, Mayer, Brown, Rowe & Maw, 350 S. Grand Ave., Ste. 2500, Los Angeles, CA 90071; (213) 229-5126; anedelman@mayerbrownrowe.com.

Michael P. Richman, Esq.: Partner, Mayer, Brown, Rowe & Maw, 1675 Broadway, New York, NY 10019-5820; (212) 506-2500; mrichman@mayerbrownrowe.com.

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