The bill, which passed Congress and was signed by President Bush in April, will take effect in October and strengthens landlord rights in a number of ways, including forcing retailers to make decisions on leases much more quickly and moving landlords into a preferred class of creditors.
A retailer will have seven months after it files for bankruptcy protection to decide whether to assume or reject a lease, unless the landlord agrees to an extension. Previously a judge could extend it indefinitely, which left landlords in limbo about their space.
If a retailer rejects the lease, the landlord goes to the back of the line with all the unsecured creditors (who typically get cents on the dollar) for claims on any unpaid rent. The landlord can, of course, rerent the property. If a retailer assumes the lease, it must pay any back rent and the landlord moves to the front of the line of creditors if the retailer eventually is forced to liquidate.
The big Christmas shopping season is when troubled retailers typically make their last stands. Most retail bankruptcies are filed in the first quarter after the holiday sales boost fails to save them. Retailers that reorganize want to have at least one Christmas after restructuring to figure out which stores it can let go and which it wants to keep.
Now retailers are likely to have to choose by October which leases to keep unless their landlord agrees to an extension.
Retailers typically have been able to wait until the end of the restructuring process before they decide whether to hang on to a lease or reject it, and that allows them to make better decisions about which to keep.
