Landlord bankruptcies may roil retail turnarounds

NEW YORK Thu Dec 18, 2008 3:36pm EST

NEW YORK (Reuters) - As the clock ticks for U.S. mall owner General Growth Properties Inc (GGP.N) to renegotiate loans, the possibility that it or other large landlords may seek bankruptcy protection is threatening to complicate turnarounds for retailers who also go bankrupt.

A sharp decline in consumer spending and an inability to access credit markets has hurt both mall owners and retailers this year -- forcing many stores to close for good. Store closings have hurt rents for landlords, and many struggling retailers are renegotiating their leases as they try to stay afloat.

But if both landlords and their tenants are forced to seek bankruptcy protection at the same time, it may create a complex legal web that both would have to tread through before they can reorganize, industry experts said.

"This just complicates the entire process," said Frank Conrad, a retired U.S. bankruptcy judge who is now a partner in the restructuring group at Weiser LLP in New York.

"There's an interesting interplay between a landlord and a tenant when they file bankruptcy ... It will be interesting to see who actually wins."

At issue, the experts said, is a protection called the "automatic stay" that companies receive to protect them from creditors when they file for bankruptcy. While the automatic stay is meant to protect the company, some have found that it can also get in the way when two bankrupt entities have to negotiate.

"In this case, they both have protection from the automatic stay, so if one wished to take action against the other, they would have to seek relief from the automatic stay," said Marcia Goldstein, chair of the Business, Finance and Restructuring group at New York bankruptcy law firm Weil, Gotshal & Manges.

That means retailers and landlords that are both bankrupt may have to seek approval from the courts overseeing both cases in order to complete certain transactions, Goldstein said.

General Growth, a Chicago-based real estate investment trust that runs more than 200 malls throughout the United States, said last week it has refinanced or managed to pay down about $872 million in debt. But the company is still negotiating with lenders over another $900 million in loans that have left its fate hanging in the balance.

It said on Thursday it received an extension on the payment deadline until February 12.

The company said last month that if it cannot come to final agreements with its lenders, it may be forced to file for bankruptcy protection. It has hired law firm Sidley Austin as bankruptcy counsel.

This is occurring just as bankruptcy experts are predicting a wave of retailers may be forced to file for bankruptcy protection after weak holiday sales, joining dozens, like Circuit City, The Sharper Image and Linens 'n Things, which have already filed this year.

The bankruptcy laws also uniquely affect the way retailers and landlords decide to reject, sell or continue with their leases in bankruptcy court.

"The strategic benefit of bankruptcy to a retailer is the ability to reject leases," said William Henrich, vice chairman of turnaround firm Getzler Henrich.

While each situation is different, retailers are already under enormous pressure to decide within the first 120 days of a bankruptcy case which leases they want to keep, said David Carlson, a bankruptcy professor at Cardozo School of Law in New York.

"If a lender wanted to foreclose on the landlord or do anything that gets rid of the bankrupt tenant before the tenant has the opportunity to decide to accept or reject the lease, then (both) parties would have to come in and ask for permission," Carlson said.

The issue has already reared its head in the bankruptcy of Lehman Brothers Holdings Inc LEHMQ.PK, where bankrupt subsidiaries of California developer SunCal Cos, which had been loaned money by Lehman prior to the firm's bankruptcy, asked the Lehman bankruptcy court for relief.

At the hearing SunCal's lawyer said it was in a unique situation, and that he believed some of the interplay issues between two bankrupt companies had not been contemplated by the bankruptcy code.

"In the environment we're in today, with increased numbers of bankruptcies there will be debtors seeking relief in other debtors' cases, and you're going to see it in almost every sector around," Weil's Goldstein said.

(Reporting by Emily Chasan, editing by Matthew Lewis)