Lease Defaults and Restructuring: The Impression of Chapter on Industrial Landlords and Tenants
The COVID-19 pandemic has wreaked havoc on the commercial real estate industry for the last year. For commercial tenants, customers are scarce, demand for goods and services has dried up, and supply chains have been severely disrupted. Additionally, many jurisdictions have implemented (and later re-implemented) restrictive measures, such as “stay at home” orders, leading to the widespread closure or limitation of nonessential businesses. Although COVID-19 vaccines have been approved and have begun to be distributed, the distribution process has been very slow. Accordingly, there is no clear timeline by which businesses can “return to normal.”
Accordingly, commercial landlords nationwide have been forced to prepare for and address the inability of tenants to sustain their rental obligations. For landlords to formulate their strategy, among other factors, they must be aware of the applicable lease provisions, their available remedies, the short- and long-term financial viability of the defaulting tenant and the rental market for the leased premises. On the other side of the bargaining table, tenants who are unable to pay their lease obligations likewise need to be aware of these factors in order to determine their strategy to request a deferral or abatement of rent, lease termination, or to not to pay the rent due.
Lurking in the background is the potential bankruptcy of the tenant, which may have a significant impact on the landlord’s and the tenant’s rights and remedies; and accordingly, a significant impact on the landlord’s and the tenant’s strategy with respect to both the exercise of remedies and lease restructuring negotiations.
This article highlights the relevant principles of bankruptcy law that affect the landlord/tenant relationship if the tenant enters bankruptcy voluntarily or involuntarily. It will then explore the strategic considerations that landlords and tenants should consider when the threat of a tenant bankruptcy is a real possibility.
PERTINENT BANKRUPTCY LAW PRINCIPLES
1. The Automatic Stay
Section 362(a) of the Bankruptcy Code provides that upon the commencement of the bankruptcy case, an “automatic stay” goes into effect. The automatic stay protects debtors that file bankruptcy by prohibiting any creditor from acting to obtain possession of or exercise control over property of the debtor’s bankruptcy estate. Among other consequences, the automatic stay halts the commencement or continuation of any judicial, administrative or other action or proceeding against the debtor that was commenced (or could have been commenced) before the bankruptcy filing date.
Accordingly, absent relief from the automatic stay (which is discussed below), a landlord may not take any action to collect, assess or recover on a claim under a commercial lease that arose before the bankruptcy case, including commencing or continuing an eviction action, or attempting to collect pre-petition rent. Normally, a landlord that sends lease termination notices to tenants after the petition date would violate the automatic stay.
Section 362(k) of the Bankruptcy Code provides that “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” Thus, at least in cases where the tenant is an individual (or perhaps where a trustee has been appointed in the tenant’s bankruptcy case), a landlord’s violation of the automatic stay can result in sanctions, including the entry of a court order obligating the landlord to pay the tenant’s actual damages and attorneys’ fees, and possibly punitive damages. For this reason, landlords should consult with their counsel before taking any actions against tenants, once the tenants enter bankruptcy.
To the extent that a landlord has obtained a cash security deposit from the tenant before the tenant files bankruptcy, the landlord will not be entitled to set off the security deposit against its claims against the tenant, absent relief from the automatic stay or except as set forth in the tenant’s eventual Chapter 11 plan. This presents a timing issue for the landlord, as it may take a long time for the landlord to be able to apply the security deposit.
Alternatively, if the credit support is in the form of a letter of credit from a bank or other third-party issuer (with the landlord as the beneficiary), the automatic stay would generally not prevent the landlord from drawing down on the letter of credit to obtain the proceeds to apply to unpaid lease obligations. This is based on the view that letters of credit and their proceeds are not property of the bankruptcy estate because the issuer of the letter of credit pays the beneficiary with its own funds, not with the debtor’s assets. This comes with a caveat, however. If the terms of the lease or the letter of credit require the landlord to first give the tenant notice that it intends to seek payment under the letter of credit, providing that the notice to the tenant may violate the automatic stay – which could delay, or even prevent, the landlord from drawing on the letter of credit. This risk can be mitigated if the letter of credit authorizes the landlord to draw upon it if it submits a certificate to the issuer that the tenant is in bankruptcy. In addition, if the proceeds realized from the drawing on the letter of credit exceed the amount of the tenant’s then-unpaid obligations under the lease, most leases provide that such excess would be held as a cash security deposit, in which event such excess would be subject to the automatic stay as described above. This dilemma may be avoided if the letter of credit permits partial draws, so that the landlord would continue to have the protection of a letter of credit, rather than a mere cash security deposit.
Section 362(d) of the Bankruptcy Code provides that the bankruptcy court shall lift the automatic stay if (a) “cause” exists, or (b) the debtor does not have equity in the property and the property is not necessary to an effective reorganization, and a landlord requests that the stay be lifted under such rule. However, it can be difficult for a commercial landlord to obtain relief from the stay to terminate a lease or evict a tenant over the tenant’s objection, particularly early in the bankruptcy case. This is because bankruptcy courts may defer to the tenant’s assessment early in the case that the lease may have value, or that the lease may be necessary to achieve the tenant’s reorganization. This is particularly true if the lease is clearly “below market” (i.e., the rent amount under the lease is less than the prevailing market rate), as the tenant might be able to assign the lease to a third party and receive value in exchange. The issue of tenant assignments of leases in bankruptcy is addressed later in this article.
Landlords may find more success in convincing the bankruptcy court to lift the automatic stay to simply permit them to set off their cash security deposits against unpaid pre-petition amounts due under their leases. This is because landlords have a secured claim for unpaid amounts due to the extent of their cash security deposits. Accordingly, to the extent the security deposit would cover unpaid amounts under the lease, allowing the landlord to set off the security deposit would not harm other creditors or the bankruptcy estate. In addition, if the tenant fails to make its post-petition lease payments to the landlord (which are discussed below), the landlord will likely have a strong basis to request that the bankruptcy court lift the automatic stay to permit the landlord to pursue eviction proceedings.
2. Treatment of a Tenant’s Pre-Petition and Post-Petition Lease Obligations in Bankruptcy
The Bankruptcy Code provides for different treatment of a landlord’s claim for unpaid amounts that became due before the tenant’s bankruptcy filing date (“pre-petition” claims), and a landlord’s claim for amounts that become due after the tenant’s bankruptcy filing date (“post-petition” claims).
As noted above, the automatic stay prevents the landlord from taking actions against the tenant on account of the landlord’s pre-petition claim, including setting off any cash security deposit against unpaid pre-petition amounts due under the lease. In addition, the landlord’s pre-petition claim for unpaid amounts due under the lease will be treated as a secured claim to the extent the landlord holds collateral (such as a cash security deposit), and a general unsecured claim to the extent the amount due from the tenant exceeds the value of the collateral that the landlord holds. In many bankruptcy cases, general unsecured creditors receive little or no distribution on account of their claims. In those cases, the landlord’s only practical sources of recovery may be security deposits and third-party guarantees.
If a landlord holds a pre-petition claim, it must make sure to file a proof of claim in the bankruptcy case by the deadline for the filing of such claims (the “bar date”). If a landlord fails to file a proof of claim, or files one after the bar date, it may be barred from recovering on its pre-petition claim.
On the other hand, post-petition amounts are called “administrative expenses” and are entitled to priority over general unsecured claims. Section 365(d)(3) of the Bankruptcy Code requires a tenant to perform all post-petition obligations under the lease, until the tenant either assumes or rejects the lease. The landlord’s collection of post-petition lease payments does not violate the automatic stay, and landlords do not need to obtain an order from the bankruptcy court to receive those post-petition payments. Importantly, the tenant ultimately will be required to pay all of its administrative expenses (including post-petition rent) in full and in cash to confirm a Chapter 11 plan in its bankruptcy case.
Although Section 365(d)(3) of the Bankruptcy Code requires the tenant to pay its post-petition lease obligations on a current basis, landlords should be aware that the very same Code section further provides that the bankruptcy court may extend the tenant’s deadline to perform the lease obligations that arise during the first 60 days of the bankruptcy filing. For example, the bankruptcy court in the J. Crew bankruptcy case (In re Chinos Holdings, Inc.) granted the debtors/tenants a 60-day extension of their deadline to perform their lease obligations expressly because of the COVID-19 pandemic. Tenants could even try to seek further extensions of that deadline under the bankruptcy court’s equitable powers.
In Chapter 11 cases under “Subchapter V” (certain small businesses can elect to file Subchapter V cases), however, the Consolidated Appropriations Act, 2021 that was enacted on December 27, 2020 (the “2021 CAA”) provides that the time for performance of an obligation arising under an unexpired lease of non-residential real property may be extended by the court for an additional 60 day period (for a total of 120 days after the order for relief), if the debtor is experiencing or has experienced a material financial hardship because of the COVID-19 pandemic. This special rule for Subchapter V cases expires on December 27, 2022. However, the rule will continue to apply in any bankruptcy case that is commenced before the December 27, 2022 sunset date. Thus, for example, the special rule will apply to a Subchapter V case that is filed on December 25, 2022.
Landlords must also take note of any deadlines that the bankruptcy court may establish for them to file a claim for post-petition administrative expenses. If the court establishes such a deadline, landlords will need to timely file their claims with the bankruptcy court for any unpaid post-petition administrative expenses.
3. Possible Suspension of Chapter 11 Cases
Because of the exigencies of the COVID-19 pandemic and the stay-at-home orders that are in effect in many jurisdictions, tenants may ask the bankruptcy court to suspend their bankruptcy case, and thereby also suspend the tenants’ obligation to pay post-petition lease obligations. The legal bases for this type of request are Section 105(a) of the Bankruptcy Code (which codifies the bankruptcy court’s equitable powers) and Section 305 of the Bankruptcy Code (which provides that the court may dismiss or suspend all proceedings in a bankruptcy case at any time, if “the interests of creditors and the debtor would be better served by such dismissal or suspension”).
This recently occurred in the Modell’s Sporting Goods, Inc. bankruptcy case, where the tenant intended to pursue a going-out-of-business sale, which could not be carried out because of the pandemic. In Modell’s, the court suspended the bankruptcy case for approximately three months, and permitted the debtors to defer payments of expenses (other than “essential expenses”) during the term of the suspension. Similarly, in the Pier 1 Imports, Inc. case, the bankruptcy court permitted the tenant to temporarily defer making rent payments. Accordingly, landlords that are involved in bankruptcy cases, like Modell’s and Pier 1, that are suspended due to the pandemic, may face delays in receiving post-petition lease payments.
4. General Unenforceability of Bankruptcy Termination Provisions
Leases commonly include so-called “ipso facto” provisions, which provide that the lease will be terminated or be modified if the tenant commences a bankruptcy case. Because of Section 365(e)(1) of the Bankruptcy Code, however, these ipso facto provisions are generally unenforceable against debtors in bankruptcy. Specifically, Section 365(e)(1) of the Bankruptcy Code overrides lease language that provides for lease termination or modification on the tenant’s commencement of a bankruptcy case, the insolvency or financial condition of the tenant at any time before the closing of its bankruptcy case, or the appointment of a trustee in the tenant’s bankruptcy case.
The foregoing rule does not apply to the valid termination of a lease before the tenant’s bankruptcy filing (the general rule is that a lease will be deemed terminated if all final hurdles to termination have been satisfied and the lease is not subject to any form of equitable redemption or statutory grace period). This is because Section 365(c)(3) of the Bankruptcy Code provides that a tenant cannot assume or assign any lease of nonresidential real property that was properly terminated before the commencement of the bankruptcy case. Accordingly, where the lease was properly terminated before the bankruptcy case commenced, the tenant will likely be required to vacate the premises notwithstanding the bankruptcy filing – since Section 365(c)(3) would preclude the tenant from assuming or assigning the lease. Note, however, that tenants may try to contest the validity of any pre-bankruptcy lease terminations as part of their bankruptcy litigation strategy. In addition, some states have anti-forfeiture statutes that permit a tenant to revive a terminated lease, while other jurisdictions have equitable principles that permit an otherwise-terminated lease to be resurrected.
If the landlord terminated the lease before the bankruptcy case commenced, but the tenant continues to inhabit the premises after the case commences, the best practice is for the landlord to first request relief from the automatic stay before taking steps to evict the tenant. This would reduce the risk that the landlord would be found to have violated the automatic stay by enforcing an improper termination of the lease.
5. General Unenforceability of Anti-Assignment Clauses in Bankruptcy
In addition to termination provisions, leases commonly contain provisions that prohibit the tenant from assigning the lease to a third party or restrict the tenant’s ability to assign the lease. Section 365(f) of the Bankruptcy Code overrides almost all of these provisions, specifying that notwithstanding any anti-assignment language in the lease, the tenant may assign the lease as long as certain requirements are met.
6. Assumption, Assignment or Rejection of Leases by the Tenant
In connection with its bankruptcy case, a tenant can make one of three elections with respect to its unexpired leases, subject to the approval of the bankruptcy court and so long as the tenant satisfies certain applicable requirements under the Bankruptcy Code. The tenant can:
- assume the lease in accordance with Sections 365(a) and (b) of the Bankruptcy Code;
- assume and assign the lease to a third party in accordance with Section 365(f) of the Bankruptcy Code; or
- reject the lease.
Although the landlord can object to the tenant’s motion to take any one of these three actions, the tenant does not need to obtain the landlord’s consent. All the tenant needs to do is obtain the bankruptcy court’s approval, which bankruptcy courts tend to provide so long as the debtor exercised sound business judgment in deciding which action to pursue.
If the tenant elects to assume the lease, then it will be required to:
- cure virtually all types of outstanding defaults (including unpaid rent) under the lease; and
- provide adequate assurance to the landlord that it can continue performing its future lease obligations.
Critically, if the tenant decides to assume the lease, it must assume the entire lease cum onere. The tenant cannot pick and choose which provisions of the lease it wants to assume or reject. Any modifications of the lease require the landlord’s consent.
To assume a lease, the tenant must file a motion with the bankruptcy court and provide notice to the landlord. The landlord may then object to the tenant’s request (including on the basis that the landlord’s calculation of the cure amount is greater than the tenant’s calculation, or on the basis that the tenant is unable to provide adequate assurance of future performance).
If the tenant elects to assume the lease and assign it to a third-party assignee, then:
- either the tenant or the assignee will be required to cure virtually all types of outstanding defaults under the lease; and
- the assignee will need to provide adequate assurance to the landlord that the assignee can continue performing the future lease obligations.
Tenants often assume and assign their leases as part of a sale of the tenant’s assets to a third party, or when the rental rate under the lease is below market. To assume and assign a lease, the tenant must file a motion with the bankruptcy court and provide notice to the landlord. The landlord may then object to the tenant’s request.
If a tenant makes the election to assume and assign its lease, the landlord can try to make a defensive bid to purchase the lease. If the landlord prevails in its bid, it would then be free to terminate the lease, recover the premises and rent it to a new tenant of the landlord’s own choosing. If the landlord does not prevail in its bid, then the tenant can assign the lease to any assignee, including one that the landlord does not approve.
A number of courts have held that a tenant can assume and assign leases without giving effect to any lease clause that requires the tenant to share with the landlord a portion of any net profits that the tenant receives in connection with the assignment. The rationale is that such profit-sharing provisions in a lease are unenforceable in bankruptcy, because they are effectively a restriction on assignment. This is typically the case even if the profit-sharing provision is a bargained-for exchange in which the landlord had agreed to charge below-market rent.
The Bankruptcy Code includes some additional protections to landlords in shopping centers in the event of a tenant’s assumption and assignment of its lease. It defines “adequate assurance” in this context to include requirements that:
- the “financial condition and operating performance” of the proposed assignee and its guarantors are similar to those of the tenant and its guarantors;
- the percentage rent due under such lease will not decline substantially;
- the assignee’s proposed use of the leased premises will not violate any radius, location, use, or exclusivity provisions of the lease or any such provisions contained in any other agreements related to the shopping center; and
- the assignee’s proposed use of the lease premises will not disrupt any tenant mix or balance in the shopping center.
An interesting issue arises when the debtor/tenant has subleased some or all of the premises to a subtenant. If the debtor/tenant rejects the prime lease with the landlord, would the subtenant have the right to remain on the premises? Although it is clear the debtor/tenant would be required to vacate the premises in this situation, it is not entirely clear whether any subtenants will also be required to vacate the property. This is because Sections 365(h)(1)(A) and (B) of the Bankruptcy Code (which protect certain rights of tenants if the landlord were to file bankruptcy) may be construed to give subtenants the right to remain on the property (or at least be able to raise any available rights under state law), even after the debtor/tenant rejects the prime lease. A number of courts have held that Sections 365(h)(1)(A) and (B) do not protect subtenants who do not have a direct agreement with the landlord. The basis for these courts’ conclusion is that subleases depend upon the continuing viability of the prime leases, and the rejection of the prime leases also results in the rejection of the subleases. However, a landlord might still have to litigate this issue with subtenants in jurisdictions where this issue has not yet been settled.
In addition, once the tenant rejects the lease, it will be deemed to have breached the lease. In that case, the landlord may assert:
- an administrative expense claim for any unpaid post-petition rent relating to the period between the bankruptcy filing date and the rejection date; and
- a general unsecured claim for damages arising out of that rejection (g., lost post-petition rent, the costs of re-letting the premises and attorneys’ fees, all to the extent such amounts are specifically provided under the lease).
The claim for rejection damages will be treated as a pre-petition general unsecured claim, even for rejection damages that relate to the period of time after rejection. Pursuant to Section 502(b)(6) of the Bankruptcy Code, the landlord’s claim for rejection damages is capped at an amount equal to the greater of one year’s rent, or 15% of the remaining rent due under the lease, up to a maximum of three years of rent.
Similar to the cum onere rule for the assumption of leases, if the tenant decides to reject a lease, it must reject the entire lease. In other words, the tenant cannot pick and choose which provisions of the lease it wants to assume or reject. The landlord will be required to file a proof of claim in the bankruptcy court to assert any rejection damages.
7. Tenant’s Deadline to Decide Whether to Assume or Reject Leases
Under Section 365(d)(4)(A) of the Bankruptcy Code, the tenant has an initial period (the “Initial Period”) of up to 120 days after the bankruptcy case is filed to decide whether to assume, assume and assign, or reject its unexpired commercial real property leases. Under the 2021 CAA, the Initial Period was temporarily expanded from 120 days to 210 days after the bankruptcy case is filed. The 2021 CCA’s temporary expansion of the Initial Period will expire on December 27, 2022, meaning that after that date, the Initial Period will once again become 120 days.
The Initial Period can be extended by up to 90 additional days if the bankruptcy court approves that extension, pursuant to Section 365(d)(4)(B) of the Bankruptcy Code. Any further extension (i.e., beyond the Initial Period plus the 90 additional days) requires the consent of the landlord.  This means that, unless the landlord consents to further extensions, the tenant will have no more than the Initial Period plus 90 days after its bankruptcy case begins to decide whether to assume, assume and assign, or reject its unexpired leases. During the time that the debtor is making that decision, the debtor must continue to timely perform all of its obligations under the lease. If the tenant does not make its decision by the deadline, the lease will be deemed rejected by operation of Section 365(d)(4)(A) of the Bankruptcy Code.
8. Modification of Leases
Although tenants can assume, assume and assign or reject their unexpired commercial leases without the landlord’s consent, tenants cannot modify the terms of their leases without the landlord’s consent. This is the result of the cum onere rule described above – if the debtor/tenant assumes a lease, it must accept the burdens of the lease, along with its benefits. To the extent the landlord and the tenant agree to modify the terms of the lease, the tenant must then request bankruptcy court approval to assume the lease as modified by the parties’ agreement.
An interesting issue arises when a lease is part of a battery of other documents that may be considered an inseverable whole. This issue arose in the Buffets Inc. case, where the debtors sought to reject certain leases (but not all of the leases) that were integrated into master leases. The landlords argued that the debtor could not pick and choose only specific leases within the master lease portfolio to reject (while assuming the other leases in the portfolio). Instead, the landlords argued that all of the leases in the master lease portfolio must either have been assumed or rejected in toto. The bankruptcy court agreed with the landlords based on the facts of the case and the applicable state law.
9. Credit Support for Landlords: Security Deposits, Letters of Credit and Personal Guarantees
There are several ways for landlords to obtain credit support to reduce their risk of the tenant defaulting under the lease. One method is a traditional cash security deposit. However, because traditional cash security deposits are normally deemed to be property of the tenant’s bankruptcy estate (even though the landlord holds the deposit), it is not the best credit support mechanism from a bankruptcy perspective. This is because the landlord will only be able to set off the deposit against unpaid amounts due under the lease after it obtains relief from the automatic stay or if the tenant’s Chapter 11 plan permits it. The inherent delay in applying the deposit can harm a landlord that relies on the rent payments from its tenants to meet the landlord’s own mortgage obligation on the property. In addition, if the amount of the security deposit exceeds the landlord’s claim amount, the tenant may seek “turnover” of the excess. The landlord is only obligated to return the security deposit amount that exceeds its allowed claim.
Another form of common credit support is a letter of credit, which the tenant would obtain from a third-party issuer (typically a bank). The letter of credit will provide that the third-party issuer will pay the landlord directly upon demand, with the landlord being permitted to make such demand if the contractual conditions to payment under the letter of credit (e.g., the tenant’s payment default under the lease) are met. Because of the “independence principle” inherent in letter of credit law, the automatic stay in the tenant’s bankruptcy case should not prevent the landlord from drawing on the letter of credit, so long as the lease and the letter of credit do not obligate the landlord to take any action vis-à-vis the tenant (such as providing notice to the tenant). This is because of the “independence principle,” which provides that a letter of credit is an independent contractual obligation of the issuer. As a result, landlords are well-advised to obtain a third-party letter of credit instead of a cash security deposit, and to ensure that the terms of the lease and the letter of credit do not obligate the landlord to take any action vis-à-vis the tenant before being able to draw on the letter of credit.
Another form of credit support is a guarantee by either an entity that is affiliated with the tenant, or one or more principals of the tenant. If the tenant files bankruptcy, but the guarantor does not, in most cases the landlord will be free to collect on the guarantee without ever having to set foot in bankruptcy court. This is because the automatic stay generally only applies to the specific entity or individual that has actually filed bankruptcy. However, in a few cases, the tenant will be able to obtain a bankruptcy court order extending the automatic stay to affiliates and principals that have not filed bankruptcy. Courts that have extend the automatic stay to non-debtor affiliates and principals typically only have done so because “unusual” or “extraordinary” circumstances existed. Additionally, if the guarantor itself files bankruptcy, the automatic stay in the guarantor’s own bankruptcy case will halt the landlord’s efforts to collect on the guaranty.
10. Financing Issues
Once a tenant files bankruptcy, it typically requests bankruptcy court approval to use the “cash collateral” of its lender and/or requests a new loan from a lender, which is called a debtor-in-possession (“DIP”) loan. In the first circumstance, the lender will be entitled “adequate protection.” In the second circumstance, the DIP lender likely will request security for its new loan and the pre-petition lender (if there is one) would be entitled to adequate protection if the tenant proposes to grant the DIP lender a lien that is senior to or pari passu with the pre-petition lender’s lien. In both circumstances, the lender may request a lien on the tenant’s leasehold interest, or at least a lien on any proceeds that the tenant might receive by assigning its lease.
Bankruptcy courts typically permit the debtor/tenant to grant the lender a lien simply on any proceeds that the tenant might receive by assigning its lease, as granting a lien only on assignment proceeds would not affect the landlord’s rights as to the property.
The question of whether a tenant may grant a lien on the leasehold interest (as opposed to mere proceeds) is critical. Typically, if the tenant is unable to reorganize and assume or assign its lease in Chapter 11, the landlord can regain the premises. However, if the tenant has previously granted a lien on its leasehold interest to a lender, that lender could foreclose on the tenant’s rights under the lease without having to comply with the landlord protections relating to assumption and assignment that are discussed above.
There is little case law addressing the question of whether a tenant may grant a DIP lender a lien on its leasehold interests when (a) the lease contains an anti-hypothecation provision, and (b) the landlord objects to the debtor’s request to grant such lien. On this issue, DIP lenders have contended that anti-hypothecation provisions in leases are invalid under Section 365(f) of the Bankruptcy Code. They also have cited cases suggesting that a bankruptcy court, in approving DIP financing under Section 364(c), can grant a lien on assets that are subject to negative pledge covenants. On the other hand, landlords have argued that such invalidation could apply only if such leases were actually assumed under Section 365(b). Landlords have also noted that where the lease is in a shopping center, Section 365(b)(3) of the Bankruptcy Code contains special protections for landlords in shopping center leases, and that granting a lien on the leasehold interest would eviscerate those protections.
Regardless of how a court would rule on this issue if it were contested, a debtor likely could still grant security interests on a leasehold interest when the applicable landlord fails to object to the cash collateral motion or DIP motion at issue. This means that if the lease contains an anti-hypothecation provision, the landlord should consider filing an objection to the tenant’s cash collateral or DIP motion, on the basis that the tenant should not be permitted to grant a lien on its leasehold interest under the express terms of the lease.
11. Going Out of Business Sales
Landlords that have retail tenants may also need to contend with “Going Out of Business” (“GOB”) sales. Despite any lease provisions that prohibit GOB sales, tenants will often seek (and receive) bankruptcy court approval to run GOB sales during the bankruptcy case. A bankrupt tenant’s GOB sale can negatively affect the landlord’s other tenants, because of the extensive (and colorful) signage, and the usual messiness and poor maintenance of the premises during GOB sales. Landlords often also consider GOB sales undesirable because they are associated with financially unstable companies, and may lead current or future tenants to perceive that the premises cannot support a successful business operation. Landlords typically cannot entirely prevent a tenant-debtor from having a GOB sale, because a GOB sale may be the only way for the tenant and the tenant’s creditors to maximize value for themselves.
Even though landlords typically cannot wholly prevent a GOB sale, they can try to minimize the sale’s negative impact on the premises. For example, landlords can:
- negotiate a finite time period for the sale;
- monitor the signage and advertising to ensure that it does not disrupt other tenants;
- monitor the sale to ensure compliance with applicable guidelines for the premises, such as noise levels, capacity, and cleanliness; and
- monitor the premises to ensure proper maintenance.
If a landlord cannot reach an agreement with its tenant regarding GOB sales or if the tenant does not comply with its agreement, the landlord can seek intervention by the bankruptcy court to force tenant compliance. Indeed, pursuant to Sections 105(a) and 363(e) of the Bankruptcy Code, bankruptcy courts have the discretion to condition the time, place, and manner of GOB sales to balance the interests of bankrupt tenants and their landlords.
STRATEGIC CONSIDERATIONS FOR COMMERCIAL LANDLORDS AND TENANTS
With these basic principles of bankruptcy law that affect the landlord/tenant relationship in the event of tenant bankruptcy in mind, we now explore the strategic considerations that landlords and tenants should consider where the threat of a tenant bankruptcy is a real possibility.
1. Landlord’s Considerations
Given the current conditions in the marketplace, commercial landlords can safely surmise that one or more of their tenants is facing, or may soon be facing, financial stress. Landlords that become aware of a tenant’s potential financial stress (whether through direct communication with the tenant, the tenant’s failure to pay rent, abandonment of its space, or through third-party sources) should attempt, as promptly as possible, to gather information to confirm whether the tenant has reached a point where it is (or will be) unable to pay all of its obligations as they become due. As part of that information-gathering exercise, the landlord should consider asking the tenant directly about its current financial condition and its prospects. If the lease provisions contain financial or operational reporting obligations on the part of the tenant, the landlord should press the tenant to deliver the required reporting.
In addition, the landlord should not be surprised if, during its discussions with the tenant regarding possible rent relief and lease modifications, the tenant states that it may file bankruptcy if the landlord does not agree to the tenant’s demands. Indeed, the threat of bankruptcy is often a negotiation tactic in many restructuring discussions, as the tenant could file bankruptcy and, without the landlord’s consent, reject the lease – which could leave the landlord with little or no recovery – or take advantage of a below-market rent and assume and assign the lease to a new occupant. This threat of bankruptcy and subsequent lease rejection (or assumption and assignment) could lead the landlord to agree to a negotiated workout in order to minimize the chances of the tenant’s bankruptcy filing. Although landlords should not necessarily take the threat of bankruptcy at face value, astute landlords will consider what their likely outcome would be if their tenants ultimately do file bankruptcy.
Below are some steps that a landlord should take when its tenant is facing financial difficulties and there is a possibility of the tenant’s bankruptcy.
A. Familiarize Yourself With Your Lease Documents
Before a landlord makes the determination to place the tenant in default, or commences any discussions with a tenant concerning a possible lease modification, the landlord (with the assistance of counsel) must review the existing lease documents. In particular, the landlord should review the default provisions of the lease (and any relevant provisions which may excuse performance) to determine what actions or omissions have occurred may constitute a default by the tenant, applicable notice and cure periods, and whether any event excuses the tenant’s duties to perform. In addition, the landlord should review applicable remedies for the default under the lease, and any obligation to mitigate the damages caused by the tenant’s breach.
B. Default Notices: The Clock is Ticking
Once a landlord determines that a default or an event of default has occurred under the specific terms of the lease, it should send any required default notice to the tenant as soon as possible. With the threat of the tenant’s bankruptcy looming, the landlord needs to be cognizant of the substantial advantage of having the lease terminated prior to the bankruptcy filing. If the lease is not terminated before the tenant’s bankruptcy filing, the tenant will be able to remain in the premises until it either rejects the lease, assumes the lease, assumes and assigns the lease, or the automatic stay is lifted to allow the landlord to terminate the lease (and, until such time, the landlord will be unable to enforce any of its remedies for the tenant’s default and/or re-let the premises to a more palatable tenant). This will be the case even if the landlord has declared a default under the lease prior to the bankruptcy. In fact, once the tenant files bankruptcy, the landlord may be in violation of the automatic stay if it subsequently sends a default notice without first obtaining a lift-stay order from the bankruptcy court.
Accordingly, if the landlord seeks the leverage of having the lease terminated prior to the bankruptcy, taking the first step in that process – sending any required default notice – promptly is critical. The timing sensitivity is particularly acute since many leases give the tenant some period of time after the notice is delivered to cure the applicable defaults. Even worse, if the landlord waits too long to send any notice that is required under the lease, the tenant may argue that the landlord has waived the default, or that equitable principles (such as the doctrines of laches or estoppel) preclude the landlord from exercising its remedies.
The landlord is advised to send any required default notice to the tenant, even if it expects to negotiate a workout or does not yet intend to exercise its remedies. By sending the notice as soon as the default is identified, the landlord can:
- maximize flexibility and avoid delays if the landlord needs to terminate the lease before the tenant files bankruptcy; and
- minimize the risk of the landlord inadvertently waiving remedies that are not promptly exercised.
In addition, the lease may permit the landlord to apply the security deposit or to draw a letter of credit against unpaid lease obligations after a default has occurred, so sending out the notice earlier may allow the landlord to exercise its rights as to the security more quickly. This is particularly critical if the landlord holds a cash security deposit, because the automatic stay would delay (and limit) the landlord’s ability to apply the cash security deposit against the outstanding amounts due under the lease. If the landlord is the beneficiary of a letter of credit, the landlord should limit its draws to the amount in default, so that the balance would not be held as a cash security deposit that could be subject to the automatic stay.
C. Possible Termination of the Lease
The proper termination of a lease before the tenant’s bankruptcy filing prevents the lease from becoming property of the tenant’s bankruptcy estate, and as set forth above, the tenant will not be permitted to elect to reject, assume or assign the lease. This significantly reduces the tenant’s leverage over the landlord, because the bankruptcy filing will not resuscitate a lease that was validly terminated before the bankruptcy, and the landlord will be free to pursue an eviction of the tenant. Even if the lease is terminated, the landlord would still be free to negotiate a new lease with the existing tenant, if the landlord believes that a restructured lease with the existing tenant is more desirable than entering into a lease with a new tenant.
The word “proper” is emphasized in the paragraph above, because a bankruptcy court could conclude that the landlord’s purported termination of the lease was ineffective. This can occur if the landlord fails to terminate in strict compliance with the express terms of the lease and applicable law. For example, if the lease requires the landlord to provide seven days’ prior notice to the tenant, but it purported to terminate the lease on only three days after delivering notice, the termination may be ineffective. As another example, if the landlord demands payments that are higher than those to which it is entitled under the lease, the landlord’s subsequent termination of the lease because of the tenant’s failure to pay such higher amount may be improper. In addition, any action that the landlord takes against the tenant under the mistaken assumption that the tenant was in default could expose the landlord to liability.
The Bankruptcy Code overrides lease language that provides for the termination or modification of the lease due to the tenant’s commencement of a bankruptcy case, the insolvency or financial condition of the tenant at any time before the closing of its bankruptcy case, or the appointment of a trustee in the tenant’s bankruptcy case. Only a “proper” termination of the lease before the tenant files bankruptcy will be recognized by the bankruptcy court.
Even if the landlord does everything that it is required to do under the lease and applicable law to terminate the lease, it should be prepared for the tenant to dispute the termination in court. In certain situations, the bankruptcy court may find a way to restore a tenant’s contract rights notwithstanding the lease terms. This is especially true where lease defaults are non-monetary, where a landlord can be made whole if the tenant makes all outstanding payments, or where the terms of the lease or the issues in dispute are unclear or subject to differing interpretations.
D. Tenant Bankruptcy vs. Lease Workout
In connection with considering defaulting the tenant and pursuing the landlord’s remedies under the lease, where such action may force the tenant into bankruptcy, the landlord must compare its potential recovery in the bankruptcy process against what the landlord may be able to achieve through a lease modification.
First, the landlord needs to consider what is the likelihood that the tenant will actually file bankruptcy. In doing so, the issues that the landlord should think about include whether:
- the lease represents a significant portion of the tenant’s total expenses;
- the tenant has other leases or other contractual or debt obligations that it is having trouble satisfying;
- any principal or affiliate of the tenant has guaranteed the tenant’s lease obligations; and
- the landlord holds any collateral to secure its claim for lease damages and in what form such security exists (g., cash security deposit or letter of credit).
If the lease represents a small portion of the tenant’s expenses, if the tenant is not experiencing difficulty in complying with its obligations under other leases and debt instruments, or if a solvent principal or affiliate has guaranteed the tenant’s lease obligations, the tenant may be less inclined to actually file bankruptcy if a lease workout is not agreed to. This may give the landlord more leverage during any lease workout discussions with the tenant.
On the other hand, if the tenant is behind in its obligations under several other leases and under its other contractual and debt obligations, and is in severe financial distress, the tenant is likely to file bankruptcy regardless of whether the landlord reaches a deal with the tenant with respect to its particular lease. In that circumstance, the landlord needs to more closely consider what it will realize from the lease if the tenant files in bankruptcy.
Second, the landlord needs to consider whether the rent under its lease is above-market (i.e., the rent under the lease exceeds the current market rate) or below market (i.e., the rent under the lease is less than the current market rate). If the rent is above-market, the tenant may be more bold in requesting rent reductions, and less likely to agree to continue paying rent at the rate provided under the lease. In this situation, the landlord should be reminded that its claim for damages resulting from the tenant’s lease rejection will be subject to a cap under the Bankruptcy Code. Therefore, the landlord may be better off agreeing to a modification of the lease to avoid the tenant’s bankruptcy. Conversely, if the rent is below market, the tenant could potentially monetize the lease, so it may be less willing to suffer a lease termination. Instead, a tenant holding a below market lease may more seriously consider filing bankruptcy to interrupt any eviction action and to assign the lease to a third party. In this situation, the landlord may want to attempt to negotiate a termination of the lease, in lieu of incurring the risk of the tenant assigning the lease to a third party in bankruptcy where the tenant (rather than the landlord) will enjoy the profit on the assignment and the landlord could be stuck with a new tenant it never bargained for. As noted previously, a number of courts have held that profit-sharing provisions in leases are unenforceable in bankruptcy, because they effectively act as restrictions on assignment.
Third, closely tied to the market rental rate discussed above, the landlord needs to consider whether there are potential alternative tenants for the leased premises, and how likely it would be that the premises would remain vacant if the landlord evicts the tenant or if the tenant rejects the lease in bankruptcy. If the tenant presents a serious ongoing credit risk, and the landlord expects to be able to re-let the premises to an acceptable tenant relatively swiftly, the landlord will certainly lean toward rejecting the tenant’s workout demands and terminating the lease. In that situation, the landlord may be less concerned about the tenant’s bankruptcy, as a seriously struggling tenant might not be able to satisfy its obligations if it tried to assume the lease in bankruptcy; but the landlord would want to move ahead with terminating the lease aggressively in order to not have the availability of the leased premises for re-leasing delayed by the bankruptcy process. Conversely, if the landlord expects there to be relatively few acceptable replacement tenants, the landlord may be more interested in reaching a deal with the tenant (thereby reducing the risk of a bankruptcy filing).
Fourth, if the tenant is behind in its payment obligations under the lease, the landlord may face preference liability under Section 547 of the Bankruptcy Code if the tenant pays the overdue arrearages and subsequently files bankruptcy. Section 547(b) of the Bankruptcy Code provides that a debtor-in-possession or a bankruptcy trustee may avoid a pre-bankruptcy transfer of the debtor’s property (e.g., a payment to a landlord) that is:
- made to a creditor;
- on account of an antecedent debt;
- while the debtor was insolvent;
- within ninety days before the bankruptcy filing (or one year before the bankruptcy filing if the transfer was made to an insider); and
- that made the landlord better off than it would have been if the transfer had not been made and the debtor had liquidated in Chapter 7.
A landlord may try to assert one or more of the statutory defenses to preference actions, which are enumerated in Section 547(c) of the Bankruptcy Code. A common defense is that the debtor made the transfers at issue to the landlord “in the ordinary course of business or financial affairs of the debtor and the landlord” or “according to ordinary business terms.” Another common defense for landlords is that they “gave new value to or for the benefit of the debtor” after it received the transfers at issue.
Fortunately for landlords, the 2021 CAA provides a temporary new statutory respite from certain types of preference liability. Specifically, the 2021 CAA added a new Section 547(j) to the Bankruptcy Code, which creates a temporary new exemption from preference liability for creditors, which is designed to encourage rent deferral and vendor workout agreements. It prohibits any debtor in possession or trustee in any bankruptcy case from avoiding payments made by a debtor during the preference period for “covered rental arrearages.” To qualify for the exemption, the debtor and the landlord must have amended the lease after March 13, 2020, and the amendment must have deferred or postponed payments that were otherwise due under the lease. The preference exemption does not apply to the payment of fees, penalties, or interest in excess of the fees, penalties, or interest the debtor would otherwise have owed without the deferral. This new provision expires on December 27, 2022, which is two years after the 2021 CAA was enacted. However, it will continue to apply in any bankruptcy case that is commenced before the December 27, 2022 sunset date.
Fifth, the landlord should consider what its likely outcome would be if the tenant ultimately were to file bankruptcy. For example, if the tenant files bankruptcy while it remains in the premises, the landlord can take advantage of the landlord protections under the Bankruptcy Code, such as the debtor’s obligation to pay the reasonable value of its leasehold interest during bankruptcy, unless and until the tenant rejects the lease in bankruptcy. In addition, the landlord might be able to pursue its rights with respect to any credit support that the tenant provided, such as a cash security deposit, a letter of credit or third-party guarantee. However, the landlord should be cognizant of any possible limitations, such as how the automatic stay may delay its ability to exercise its setoff right with respect to a cash security deposit or its ability to draw on a letter of credit if the landlord is obligated to first provide notice to the tenant (which may violate the automatic stay). The landlord should also take into account the legal fees it may incur in fighting the tenant in bankruptcy, as well as the limitation on the damages that a landlord may assert if the tenant rejects the lease.
In light of the COVID-19 pandemic, among the risks that the landlord must consider if its tenant files bankruptcy is the possibility that the bankruptcy court may suspend the tenant’s bankruptcy case, as recently occurred in the Modell’s Sporting Goods, Inc. and the Pier 1 Imports, Inc. cases. In those cases, the landlords endured substantial delays in receiving their post-petition lease payments during the period of the case suspensions.
Sixth, if the premises are located in a shopping center or in another type of multi-tenant development, the landlord should consider whether the bankruptcy of the tenant will impact other tenants’ rights under the landlord’s leases with those other tenants (such as co-tenancy conditions).
Finally, the landlord should also think through the tenant-side considerations that are discussed in Section II below. For example, does the landlord believe that the benefits the tenant might obtain through bankruptcy are worth the disruption to the tenant’s business, and the costs and administrative burdens that a bankruptcy filing would impose on the tenant?
E. Opportunities For the Landlord To Modify the Lease
In the current economic environment, many landlords are unable to find substitute tenants that make more economic sense then maintaining the current tenant in place, even with the landlord granting the existing tenant rent relief. If the landlord determines that its best business decision is to grant the tenant rent relief, rather than pursuing its default claim and leading the tenant into bankruptcy, the landlord should consider certain modifications that can add value to the lease in exchange for such relief. The following is a non-exhaustive list of concepts the landlord may consider negotiating into the lease in exchange for granting the tenant rent relief:
- additional credit support, such as a letter of credit or a third-party guaranty;
- increased rent in future periods, particularly if the rent under the lease is currently below market;
- extension of the term of the lease, particularly if the tenant has complied with its lease obligations until now and the landlord would otherwise like to keep the tenant in place;
- reduction in the term of the lease or landlord early termination right, if the landlord would prefer the tenant to vacate soon;
- elimination of any rights of first refusal or rights of first offer, or options to extend, on the part of the tenant;
- the restructuring of any economic terms, such as lease assignment profit-sharing provisions, that may be unenforceable in the tenant’s bankruptcy case;
- for example, the landlord may negotiate to receive more rent in the future, in exchange for removing the profit-sharing provision;
- modification of the existing default notice and cure provisions to the extent they can be made to be more favorable to the landlord;
- for example, a default can be self-executing, without the requirement of notice by the landlord; and
- in light of the current COVID-19 pandemic, a requirement for the tenant to apply for governmental assistance programs and to pay any proceeds from those programs toward deferred or forgiven rent.
If the landlord has mortgaged the property, it must confirm its rights to modify the applicable lease without lender’s consent. Among other prohibited modifications, the loan documents may limit the latitude that the landlord has to grant rent relief. In addition, many loans contain covenants that require minimum debt-service coverage ratios, levels of rent and/or occupancy levels. Similarly, if the landlord is an investment trust it might have fiduciary duties to its shareholders that limit its options in aiding an insolvent tenant. In either event, the consent of the applicable third party (e.g., the mortgage lender or the shareholders) may be required as a condition to the landlord entering into the applicable lease modification.
2. Tenant’s Considerations
On the other side of the table, when a tenant faces financial distress and contemplates seeking rent relief or other lease modifications from its landlord, it make sense to consider the strategy of threatening bankruptcy. If the lease is at an above-market rent, then the tenant’s threat to file bankruptcy could leave the landlord at risk of obtaining limited damages if the lease is subsequently rejected in a tenant’s bankruptcy case. If the tenant’s lease is at a below-market rent, then the tenant’s bankruptcy could leave the landlord unable to capitalize on terminating the lease and capturing the higher market rent under a lease with another tenant, because the tenant may elect to assume and assign the lease in bankruptcy without the landlord’s consent (notwithstanding a lease provision requiring landlord’s consent to the contrary). Additionally, the tenant likely can assume and assign leases without giving effect to any lease clause that requires the tenant to share with the landlord a portion of any net profits that the tenant receives in connection with the assignment. Moreover, as noted earlier, the tenant’s bankruptcy filing will result in the imposition of the automatic stay, which can delay the landlord’s ability to set off a cash security deposit against the tenant’s unpaid lease obligations; and as explained above, the landlord faces the risk of delays in receiving post-petition lease payments, in the event the bankruptcy court allows the case to be suspended in light of the COVID-19 pandemic.
The tenant can typically assume, assume and assign, or reject a lease in bankruptcy without the landlord’s consent. After the lease is rejected, the landlord will be left with:
- an administrative expense claim for any unpaid post-petition rent relating to the period between the bankruptcy filing date and the rejection date; and
- a general unsecured claim for damages arising out of the rejection (g., lost post-petition rent, the costs of re-letting the premises and attorneys’ fees, all to the extent such amounts are specifically provided under the lease).
That general unsecured claim for rejection damages will be limited to the greater of one year’s rent, or 15% of the remaining rent due under the lease, up to a maximum of three years of rent. Particularly where the lease is at an above-market rent, the landlord will be faced with the risk of receiving little or no recovery on account of its rejection damages claim (in addition to the time and cost of pursuing its remedies in the bankruptcy). Accordingly, the threat of bankruptcy can give the tenant meaningful leverage during lease renegotiation discussions.
In some circumstances, it will make sense for the tenant to file bankruptcy if it cannot reach a workout agreement with the landlord, particularly if the tenant has substantial other debts that it is unable to pay, if it wishes to sell its assets to a third party that wants to purchase the assets “free and clear” of liens and claims, or where the lease is at a below-market rental rate. If the tenant files bankruptcy, in addition to the right to reject the lease described above, the tenant will typically have the right to assume, or assume and assign, its lease. To the extent that the tenant wishes to sell its assets to a third party, the tenant will be able to assign its lease to that party.
The threshold question for the tenant to answer is whether it can make a credible threat to the landlord that it will actually file bankruptcy. This will depend on the tenant’s particular facts and circumstances. Even financially solvent tenants can file bankruptcy, because insolvency is not a requirement for a bankruptcy filing. As a general matter, the tenant will be allowed to remain in bankruptcy if:
- it is suffering some sort of financial distress that can be ameliorated through the bankruptcy process (even if it is solvent);
- it is not filing bankruptcy simply to obtain a tactical litigation advantage; and
- the bankruptcy filing serves a legitimate bankruptcy purpose.
Legitimate bankruptcy purposes include the reorganization of the tenant’s balance sheet, to halt and centralize pending or threatened litigation against the tenant, to make operational changes (including exiting geographic markets and rejecting leases), or to sell the tenant’s assets as a going concern to a third party.
If the tenant files bankruptcy primarily to reject a lease and therefore to subject its landlord to the Bankruptcy Code’s statutory cap on rejection damages, there will usually be an open question about whether the bankruptcy case could be dismissed as a “bad faith” filing. The particular facts and circumstances of the tenant’s case will drive the bankruptcy court’s analysis. If the tenant is suffering financial distress that can be ameliorated by the bankruptcy case and has filed bankruptcy to preserve value for creditors, the court will be more likely to allow the case to proceed and allow the tenant to assume, assume and assign, or reject the lease. The reverse is true if the bankruptcy court finds that the tenant was not in financial distress and only filed bankruptcy to obtain a tactical litigation advantage. Ultimately, the tenant will be able to more credibly threaten a bankruptcy filing to its landlord if the tenant is truly in financial distress and if a bankruptcy filing would serve a legitimate purpose other than simply permitting the rejection of the lease.
If the tenant’s bankruptcy filing is able to proceed, and is not dismissed as a “bad faith” filing, the tenant would most likely be able to assume, assume and assign, or reject its lease, so long as the requirements to do so under the Bankruptcy Code are satisfied (e.g., the obligation to cure defaults and to provide adequate assurance of future performance, if the tenant seeks to assume or to assume and assign its lease). Bankruptcy courts normally will defer to the business judgment that the tenant makes in determining whether it is most beneficial to the tenant to assume, assign or reject its lease.
Tenants should be aware of the material drawbacks and risks to a bankruptcy filing, however. First, a bankruptcy filing can be extremely disruptive to the business, particularly if appropriate pre-bankruptcy planning is not performed. For example, customers and vendors may refuse to do business with bankrupt tenants (particularly if no contract requires such third party to continue doing business with the tenant), as those customers and vendors may be concerned that the tenant’s business will liquidate, and thus not be able to comply with its obligations to those customers and vendors. Second, Chapter 11 bankruptcy is a time-consuming and expensive process, and the tenant typically will need to pay the fees and expenses of not only its own professionals, but also those of any official committees that are appointed in the case. Third, operating in bankruptcy requires the tenant to comply with numerous administrative responsibilities, such as preparing bankruptcy schedules and statements of financial affairs, and appearing at required meetings and court hearings. The tenant will need to determine whether these drawbacks and risks to filing bankruptcy are worth the benefit of assigning or rejecting a lease in a bankruptcy case.
 The Bankruptcy Code is Title 11 of the United States Code.
 As a general matter, 11 U.S.C. § 362(a) provides that a voluntary or involuntary bankruptcy petition automatically operates as a stay of the commencement or continuation of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the bankruptcy case, or to recover a claim against the debtor that arose before the commencement of the case under this title; the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the bankruptcy case; and any act to obtain possession of property of the estate or of property from the debtor’s bankruptcy estate or to exercise control over property of the debtor’s bankruptcy estate.
 See, e.g., In re 48th Street Steakhouse, Inc., 835 F.2d 427 (2d Cir. 1987). On the other hand, mere informational statements that make no threats or require any action on part of the debtor might not violate the automatic stay. See, e.g., In re Schatz, 452 B.R. 544, 549 (Bankr. M.D. Pa. 2011).
 There is a split of authority on the question of whether a bankruptcy trustee is an “individual” injured by a violation of the automatic stay for purposes of Section 362(k) of the Bankruptcy Code. See, e.g., In re Glenn, 379 B.R. 760, 762 (Bankr. N.D. Ill. 2007) (holding that a bankruptcy trustee is not an “individual” for purposes of Section 362(k); In re Howard, 428 B.R. 335, 336-37 (Bankr. W.D. Pa. 2010) (holding the opposite).
 In a typical letter of credit arrangement, the obligor enters into an underlying contract with the beneficiary, and the obligor also enters into a separate agreement with the letter of credit issuer (typically a bank) for the latter to issue a letter of credit. The beneficiary is permitted, under specified conditions, to present certain documents to draw down a certain amount under the letter of credit. Then, the obligor is obligated to pay to the letter of credit issuer a sum in the amount the beneficiary has drawn. each of the contractual relationships is independent of the others.
One of the most basic precepts of letter of credit law and practice is the principle of independence. The concept is that each of these relationships is independent of the others, and the rights and obligations of the parties to one are not affected by the breach or non-performance of any of the other. The obligor’s obligation to reimburse the letter of credit issuer for its proper honor of demands for payment under the letter of credit is unaffected by disputes over performance of its contract with the beneficiary, and the account party must reimburse the issuer who paid on a proper demand even if the beneficiary breached the underlying contract. See, e.g., In re Lancaster Steel Co., 284 B.R. 152, 158 (S.D. Fla. 2002).
 11 U.S.C. § 362(d).
 Section 365(d)(3) of the Bankruptcy Code provides that: “The trustee shall timely perform all the obligations of the debtor, except those specified in section 365(b)(2), arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title.”
 See 11 U.S.C. § 1129(a)(9)(A).
 See 11 U.S.C. § 365(d)(3), which provides, in relevant part:
“The trustee shall timely perform all the obligations of the debtor, except those specified in section 365(b)(2), arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title. The court may extend, for cause, the time for performance of any such obligation that arises within 60 days after the date of the order for relief, but the time for performance shall not be extended beyond such 60-day period.”
 In re Chinos Holdings, Inc., Case No. 20-32181 (Bankr. E.D. Va., May 26, 2020) [Docket No. 323].
 11 U.S.C. § 105(a) codifies the bankruptcy court’s equitable powers, and states:
“The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.”
 In re Modell’s Sporting Goods, Inc., Case No. 20-14179 (Bankr. D. N.J. March 27, 2020 and June 5, 2020) [Docket Nos. 166 and 371].
 In re Pier 1 Imports, Inc., Case No 20-30805 (Bankr. E.D. Va. April 6, 2020) [Docket No. 493].
 Section 365(e)(2) of the Bankruptcy Code provides an exception to this rule, in cases where applicable law excuses the counterparty from accepting performance from or rendering performance to the trustee or to an assignee of such contract or lease. However, commercial landlords generally will be unable to take advantage of that exception.
 11 U.S.C.§ 365(f) provides:
(1) Except as provided in subsections (b) and (c) of this section, notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law, that prohibits, restricts, or conditions the assignment of such contract or lease, the trustee may assign such contract or lease under paragraph (2) of this subsection.
(2) The trustee may assign an executory contract or unexpired lease of the debtor only if—
- the trustee assumes such contract or lease in accordance with the provisions of this section; and
- adequate assurance of future performance by the assignee of such contract or lease is provided, whether or not there has been a default in such contract or lease.
(3) Notwithstanding a provision in an executory contract or unexpired lease of the debtor, or in applicable law that terminates or modifies, or permits a party other than the debtor to terminate or modify, such contract or lease or a right or obligation under such contract or lease on account of an assignment of such contract or lease, such contract, lease, right, or obligation may not be terminated or modified under such provision because of the assumption or assignment of such contract or lease by the trustee.
 See 11 U.S.C. § 365(b).
 See, e.g., In re Fleming Companies, Inc., 499 F.3d 300, 308 (3d Cir. 2007) (stating that “the debtor may not blow hot and cold. If he accepts the contract he accepts it cum onere. If he receives the benefits he must adopt the burdens. He cannot accept one and reject the other.” The cum onere rule “prevents the [bankruptcy] estate from avoiding obligations that are an integral part of an assumed agreement.”) [internal citation omitted].
 See 11 U.S.C. § 365(f).
 See, e.g., In re Jamesway Corp., 201 B.R. 73, 78 (Bankr. S.D.N.Y. 1996), citing Robb v. Schindler, 142 B.R. 589 (D. Mass. 1992) and South Coast Plaza v. Standor Jewelers West, Inc. (In re Standor Jewelers West, Inc.), 129 B.R. 200 (9th Cir. B.A.P. 1991).
 Section 365(f)(1) of the Bankruptcy Code invalidates provisions that prohibit, restrict or condition assignment. Section 365(f)(3) invalidates provisions that terminate or modify the terms of a lease because it has been assumed or assigned. Courts have read these two sections of the Bankruptcy Code to invalidate profit-sharing arrangements pertaining to lease assignments. See, e.g., In re Jamesway Corp., 201 B.R. at 78.
 See 11 U.S.C. § 365(b)(3).
 Section 365(h)(1) provides:
(A) If the trustee rejects an unexpired lease of real property under which the debtor is the lessor and—
(i) if the rejection by the trustee amounts to such a breach as would entitle the lessee to treat such lease as terminated by virtue of its terms, applicable nonbankruptcy law, or any agreement made by the lessee, then the lessee under such lease may treat such lease as terminated by the rejection; or
(ii) if the term of such lease has commenced, the lessee may retain its rights under such lease (including rights such as those relating to the amount and timing of payment of rent and other amounts payable by the lessee and any right of use, possession, quiet enjoyment, subletting, assignment, or hypothecation) that are in or appurtenant to the real property for the balance of the term of such lease and for any renewal or extension of such rights to the extent that such rights are enforceable under applicable nonbankruptcy law.
(B) If the lessee retains its rights under subparagraph (A)(ii), the lessee may offset against the rent reserved under such lease for the balance of the term after the date of the rejection of such lease and for the term of any renewal or extension of such lease, the value of any damage caused by the nonperformance after the date of such rejection, of any obligation of the debtor under such lease, but the lessee shall not have any other right against the estate or the debtor on account of any damage occurring after such date caused by such nonperformance.
 See, e.g., In re The Great Atlantic & Pacific Tea Company, Inc., 544 B.R. 43, 52 (Bankr. S.D.N.Y. 2016); In re Child World, Inc., 142 B.R. 87 (Bankr. S.D.N.Y. 1992).
 See 11 U.S.C. § 365(g).
 See 11 U.S.C. § 502(b)(6).
 See 11 U.S.C. § 365(d)(4)(A).
 See 11 U.S.C. § 365(d)(4)(B).
 In re Buffets Holdings, Inc., 387 B.R. 115, 119 (Bankr. D. Del. 2008); see also In re ANC Rental Corp., Inc., 277 B.R. 226, 238–39 (Bankr. D. Del. 2002).
 In re Buffets Holdings, Inc., 387 B.R. at 127. The court in Buffets noted that the determination of whether a specific contract or lease is an indivisible agreement or is several agreements in one is a question of state law. Id. at 120.
 11 U.S.C. § 362(a)(7) provides that the automatic stay applies to “the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor.”
 In A.H. Robins Co. v. Piccinin, 788 F.2d 994, 999 (4th Cir. 1986), the Fourth Circuit stated that the automatic stay may be extended to non-debtors when “unusual circumstances” exist. Such unusual circumstances may exist when “there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant and that a judgment against the third-party defendant will effect be a judgment or finding against the debtor.” An illustration of such a situation would be a suit against a third party who is entitled to absolute indemnity by the debtor on account of any judgment that might result against them in the case. Other courts have followed the test articulated in Queenie Ltd. v. Nygard Int’l, 321 F.3d 282, 287-88 (2d Cir. 2003) where the Second Circuit held that the automatic stay can be extended to non-debtors if the claim will have “an immediate adverse economic consequence for the debtor’s estate.” Examples are a claim to establish an obligation of which the debtor is a guarantor, and actions where there is such identity between the debtor and the third-party defendant that the debtor may be said to be the real party defendant.
 See 11 U.S.C. § 363(e). Section 361 of the Bankruptcy Code provides examples of the types of items a debtor can provide as “adequate protection.”
 See 11 U.S.C. § 364(d)(1).
 In Reorganized Gilbert/Robinson, Inc. v. Wagner (In re I&M Acquisition Corp.), No. 95 Civ. 2114, 1995 U.S. Dist. LEXIS 15089 at *10 (S.D.N.Y. Oct. 13, 1995), the district court held that the anti-pledge provision in the lease was unenforceable and allowed the debtors to pledge their leasehold interests as collateral.
 11 U.S.C. § 363(e) provides, in relevant part:
“Notwithstanding any other provision of this section, at any time, on request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest.”