What is an invalidating assignment
Although Code § 365(b)(3) would appear to give shopping center owners a certain amount of comfort in a tenant bankruptcy, bankruptcy courts have been reading Code § 365(f) broadly to override, as “de facto” anti-assignment provisions, just the kinds of clauses that the Shopping Center Rule is supposed to protect. In all of these provisions, references to the trustee include a debtor in possession. lease in accordance with the provisions of this section; and(B) adequate assurance of future performance by the assignee of such . It concluded that the provisions asserted by the landlords were de facto anti-assignment provisions. The landlords had raised varying degrees of objections that the proposed sale to Staples violated use restrictions in their leases. lease is provided, whether or not there has been a default in such . The court found that Code § 365(f) bans not only lease provisions that specifically prohibit assignment but also lease provisions that are so restrictive that they constitute de facto anti-assignment provisions. When negotiating a retail lease—and in particular a lease for space in a shopping center—a landlord will insist on many lease provisions that are critical to it besides rent. The provisions listed in Code § 365(b)(2) are commonly referred to as ipso facto clauses and are clearly unenforceable in bankruptcy. The court indicated that Vornado’s concerns about alterations were disingenuous. Talley is a member of the New Orleans, Louisiana, firm of Stone Pigman Walther Wittmann L. Harris Ominsky is in the Philadelphia office of Blank Rome LLP. The court noted that Vornado, in fact, had eight Staples stores in other locations.
What the landlord may not expect is for the lease to be assumed by the debtor and then assigned to another party without the assignee’s being bound by key nonmonetary provisions that the landlord negotiated in its lease. Key Nonmonetary Clauses Besides rent and term, a retail lease may include a number of provisions that are very important to a landlord and for which the landlord may have vigorously negotiated, such as:• the particular identity of the tenant,• restrictions on assignment and subletting, including provisions calling for the tenant to pay the landlord a percentage of any net profits generated by the assignment or sublease,• landlord rights of first refusal and recapture in connection with an assignment or sublease,• use restrictions,• radius restrictions limiting the tenant’s ability to operate a competing store nearby,• percentage rent clauses providing for additional rent based on a percentage of gross sales,• operating covenants requiring that the tenant continuously operate and prohibiting the tenant from “going dark” except in limited circumstances,• provisions governing alterations and improvements to the premises and requiring the landlord’s consent to changes, and• provisions governing the tenant’s signage. The third landlord argued that allowing the premises to remain dark during the renovations (in violation of a continuous operations clause) would disrupt the tenant mix of the center.The court did not find that period of time so unreasonable as to affect the use or disrupt the tenant mix. One landlord argued that an assignment to Staples would cause a substantial decline in percentage rent.It argued that other tenant percentage rents in the shopping center would drop because Staples would not be as much of a draw. 1999), involved a use restriction and a 60-mile radius restriction. It stated that the Shopping Center Rule must be read in conjunction with the anti-assignment prohibitions of Code § 365(f). Code § 365(f)(3) then states: Notwithstanding a provision in an . In approving the sale, the court cited Code § 365(f)(1) for its anti-assignment provisions.