Leases and Bankruptcy in a Time of Coronavirus.
Many businesses in bankruptcy or heading that way – particularly retail establishments – face an uncertain future as states and cities move from closures to phased re-openings.
No one knows with certainty when the economy will return to pre-pandemic levels or if phased re-openings will be extended or reversed. Business revenue may be a trickle of what it was this time last year if you even have revenue. If you lease your office, storefront, or restaurant building, what does the current economic reality mean for your lease obligations? And if you file bankruptcy, how will the bankruptcy courts handle your lease?
A recent decision from the Bankruptcy Court for the Eastern District of Virginia involving the home furnishing chain Pier 1 Imports provides one example of a bankruptcy court navigating these extraordinary times. Pier 1 was struggling before the pandemic — not selling enough futons or candles and deep in debt. When they filed Chapter 11 in February 2020, their biggest coronavirus-related concern was probable, but temporary, delays in inventory shipments from China.
What a difference three months makes. Their Chapter 11 plan did not anticipate a complete freeze on economic activity or shelter-in-place orders to citizens and closure orders for non-essential businesses. Pier 1 closed stores, furloughed employees, and took other measures to survive. Revenue tanked. They obtained rent deferrals from some lessors for their retails stores, but others demanded payment. So Pier 1 asked the bankruptcy court to allow them to defer rent payments for a few months. The lessors objected.
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JDSUPRA written by Ward and Smith, P.A.. Published May 28, 2020.