Protect Yourself During FDIC Receivership of Bank Tenant

As an owner in the current recession, you probably thought that a tenant's bankruptcy due to the economic downturn would be the most difficult issue you would have to deal with. However, failing banks, unlike your other tenants, are not subject to the bankruptcy process under the Bankruptcy Code. Rather, they are subject to the FDIC receivership process—and, as the owner, so are you.

As the owner of property leased to a failed bank, you have fewer protections under FDIC receivership than under bankruptcy, which is why it is critical for you to understand the process of receivership and what you should do if you are facing—or heading toward—this difficult situation.

Understand FDIC Receivership

When a failing bank is subject to a cease-and-desist order from a government agency, one of the outcomes could be that the bank is taken over by the Federal Deposit Insurance Corporation (FDIC) as the receiver. Generally, the FDIC as receiver prearranges a sale of the whole bank or portions of it to another bank or to a buyer—but typically another bank. At that time, the parties enter into a purchase and assumption agreement, which establishes that the buyer is buying the failing bank, but not necessarily buying certain real property assets—in this case, the lease between you and the failing bank. The purchase and assumption agreement also gives the buyer a period of time to evaluate the lease and determine whether it wants to take or exclude it from its purchase of your failing bank tenant.

Regardless of whether the buyer immediately decides that it doesn't want the lease or later excludes it from its purchase of the bank, the FDIC as receiver has the power to repudiate—that is, terminate—the lease. Repudiation is much broader and stronger here than in bankruptcy; it means that the lease can be cancelled unilaterally by the FDIC.

Get Control over FDIC Receivership Situation

The FDIC receivership process may leave you feeling powerless over your own property. Even at the outset, you cannot be assured you will receive specific notice that the bank is for sale.

“There are some requirements when the FDIC takes over as receiver, but they are very loose, so the best practice is for the owner to monitor the health of its bank tenant,” says Dana Schiffman, a partner at Allen Matkins Leck Gamble Mallory and Natsis LLP. Schiffman, whose practice encompasses shopping center development, expansion, and redevelopment. Schiffman points out that there are various ratings services and Internet resources available that describe the financial health of banks. This is an easy way for you to get a sense of whether your bank tenant might be a candidate for or is already subject to a cease-and-desist order—and might be in the process of ultimately failing and being taken over by the FDIC. The best thing that you can do is know that this is happening and plan for it.

What you may be able to recover after a bank tenant's failure and FDIC receivership depends on whether the lease has been repudiated. The FDIC may repudiate at the time that the receivership is put in place or within a reasonable time—roughly 90 days. For example, will you be paid for rent that has accrued between the receivership and the repudiation?

To understand what protections you will be afforded under an FDIC receivership and what you may be entitled to recover, contrast it with the bankruptcy process, which you probably already are familiar with, says Ted Fates, an associate at the San Diego office of Allen Matkins Leck Gamble Mallory and Natsis LLP.

Bankruptcy. In the bankruptcy process, a bankruptcy petition is filed with the court and notice goes out to all creditors. (There also is an online system where owners can easily find out if their tenants are bankrupt.) In bankruptcy, the lease may be rejected, which is a concept analogous to repudiation except that there is an ability to collect for the owner's future damages, such as the unpaid rent after the date of rejection. “It's a cap, but there is that ability to recover for damages to some extent,” says Fates.

FDIC receivership. In FDIC receivership, access to information about what is going on is limited. You may not get an official notice in the mail that says that your bank tenant has failed and been taken over by the FDIC, says Fates. So you need to monitor it and check the FDIC's Web site for that information. You can check from week to week for banks that have been taken over.

If you find out that your bank tenant has been taken over by the FDIC, what will happen next? At this point, there are two scenarios: Your lease will be assumed and assigned to the acquiring bank, or, if the acquiring bank does not want to assume your lease with the failed bank, the lease will be repudiated by the FDIC.

You probably will have to wait—up to 90 days—while these decisions are made. During that time you can try to reach out to the acquiring bank to get more information on whether it plans to assume the lease. An owner equipped with the knowledge of what is going on might want to negotiate with the buyer during the period between the receivership and the repudiation or assumption decision, to restructure the lease, which might otherwise be repudiated. You can find out who the buyer is through the FDIC.

Be persistent in reaching the appropriate people at the buying bank if you believe that your space is not one that they are going to want. You need market information to determine whether this location is a strong or redundant one before you initiate these discussions, so you can offer appropriate lease restructuring incentives.

The buyer may reach out to you first if it is interested in restructuring, which may be good news for you because even in post-receivership you will have a solvent tenant and be able to deal with it in the normal course of events.

If Lease Is Repudiated

If your lease is repudiated and rent had accrued before the FDIC stepped in as receiver, you will have to get in line behind depositors to get paid. If funds are generated from the sale of the bank, depositors get paid first and creditors get paid second.

However, you can enforce payment of the rent that accrued after the FDIC receivership but before the repudiation. This is because the rent has accrued during a period of administrative priority, says Schiffman. If the lease is repudiated and terminates, the owner cannot collect future damages, such as rent through the end of the lease term. In comparison with bankruptcy, with the FDIC as receiver, there are no future damages to collect.

Although the FDIC has the discretion to determine what is and is not a priority claim, it generally does consider the rent between the receivership and repudiation as a priority and pays it, notes Fates, whereas payment of rent is absolutely required under the Bankruptcy Code.

When a tenant goes into bankruptcy, there is an automatic “stay” during which creditors cannot collect from the bankrupt tenant at all. Even sending a letter to the tenant demanding payment is considered a violation of the very broad automatic stay. In an FDIC receivership, there is no automatic stay, so the owner can continue to demand payment of the rent from the failed bank and take any steps it deems appropriate to enforce its lease. “Owners should not be hesitant to aggressively pursue their tenants for full rent after the FDIC receivership has begun,” says Fates, “because they are not risking violation of a stay.”

If Lease Is Assigned

If the buyer has determined that it will take over your lease with the failed bank, it still must deal with restrictions on transferability that are found in many commercial leases. Again, the FDIC acts as a trustee in this situation. As receiver, it has the complete power to transfer the leasehold without anyone's—even your—approval to the incoming bank.

In this situation you will have no control or input at all. That is an important distinction. In bankruptcy, sometimes the assumption is coupled with the new tenant sharing certain past defaults, but there is no such requirement with respect to assignment and assumption orchestrated by the FDIC, and you will have far less protection in this context.

FDIC Receivership Is Emerging Issue

As an owner in a recession that has very negatively affected commercial real estate, it's crucial that you try to understand what is happening with banks in the context of commercial real estate.

“It really has been a difficult time to make complete sense of the market dynamics,” says Schiffman. He says that although the big national banks have achieved a degree of health and have gone through a stress test, many local or regional banks are under regulatory pressure behind the scenes that is building. For as many failures as there already have been, there will be a lot more, he predicts. Owners with failed bank tenants are realizing that the FDIC is now their owner essentially and that they are subject to this process—even though it is the tenant that has failed.

Insider Sources

Ted Fates, Esq.: Associate, Allen Matkins Leck Gamble Mallory and Natsis LLP, 501 W. Broadway, 15th Fl., San Diego, CA 92101-3541; (619) 233-1155; tfates@allenmatkin.com.

Dana Schiffman, Esq.: Partner, Allen Matkins Leck Gamble Mallory and Natsis LLP, 501 W. Broadway, 15th Fl., San Diego, CA 92101-3541; (619) 233-1155; dschiffman@allenmatkins.com.

Sidebar

FDIC Receivership: Owner Checklist

• * Be vigilant and aggressive about FDIC receivership, says Ted Fates, an associate at Matkins Leck Gamble Mallory and Natsis LLP. Don't assume that you are going to be notified of what is going on with your bank tenants. No one will explain the process to you, so be aggressive about getting information. “Half the battle is knowing what is going on so that you can react to it in the appropriate way,” he advises.

• * Be clear from your initial conversation with the FDIC to assert that the rent that is accruing from receivership to repudiation is an administrative claim. You want to make sure that your rent is getting paid, Fates emphasizes.

• * Try to find out as early as possible whether the lease is going to be repudiated. You need as much time as possible to start looking for a new tenant.

Search Our Web Site by Key Words: FDIC receivership; lease repudiation; lease assignment; bankruptcy