As more and more retail enterprises file for bankruptcy, commercial landlords are often confronted with tenants who wish to conduct bankruptcy court-approved going-out-of-business sales ("GOB sales"). From the landlord's perspective, these sales are usually undesirable because they are associated with companies that are financially unstable and may lead current or future tenants to perceive that the landlord's space cannot support a successful business operation. As a result, landlords frequently draft into the "Use" or "Operation by Tenant" sections of their leases explicit restrictions prohibiting GOB sales. However, the majority of courts addressing issues regarding the permissibility of GOB sales have allowed such sales to go forward, notwithstanding express restrictions to the contrary. In permitting GOB sales, these courts find that fairness favors maximizing the estate and ultimately, the distribution to creditors. As a result, the courts do not hold the debtor-tenant to the restrictive lease provisions.
Short of preventing it, how can a landlord protect itself in the face of an impending GOB sale? The landlord's focus should be on negotiating or litigating reasonable conditions and guidelines to govern the GOB sale. The landlord should consider the following key issues:
- Duration How long will the GOB sale last? A landlord should negotiate a finite period of time within which a tenant may conduct a GOB sale.
- Hours of Operation Will the GOB sale be conducted within the normal operating hours of the mall or shopping center or will special hours be designated for the sale? The landlord should balance the desire to avoid disruption to other tenants during normal operating hours with the need to have sufficient walk-in business, which may be more difficult during specially designated hours.
- Mall/Center Regulations Will the GOB sale comply with the mall or shopping center regulations or guidelines concerning security, maintenance, trash removal or any other pertinent guidelines? If the debtor-tenant does not intend to comply with the guidelines, the landlord should consider the impact on the other tenants.
- Compliance with the Law Will the GOB sale comply with state and local consumer laws? A landlord should make sure that the sale complies with "Blue Laws" and laws of that nature that limit activities and commerce on Sundays.
- Signage and Advertising What kind of signage or advertising will be used? A landlord should pay particular attention to the signage and advertising used during a GOB sale. Remember, highly publicized GOB sales may cause current and potential tenants to lose faith in the viability of the landlord's retail space, so a landlord should think carefully about how such sales are advertised. Factors to consider include: (1) the language and wording used in the signs or advertising; (2) the number of signs or advertisements the debtor-tenant will use; (3) the placement of any signs; (4) the color of the signs; (5) whether the debtor-tenant can use amplified sound to advertise the GOB sale; and (6) whether handbills can be distributed and if so, where.
- Merchandise What kind of merchandise will the debtor-tenant sell? Specifically, should the tenant be permitted to augment the inventory with new merchandise or only merchandise from another of its stores? If the inventory is augmented, must it be of the same type of inventory usually sold by the debtor-tenant? A landlord should consider that he may want to maintain the same quality and caliber of merchandise so that the center retains its customers. Also, the landlord can negotiate whether to permit the tenant to sell furniture, fixtures, equipment and the like. If the landlord opts to allow the sale of such items, it must also be decided how those items will be removed from the leased premises, keeping in mind that removal should be effectuated in a manner that causes the least amount of disruption to the operations of the mall or shopping center.
- Rent and Lease Obligations Who is responsible for rent and lease obligations? A landlord should know to whom he will look for the payment of rent and the fulfillment of other lease obligations. If the debtor-tenant is using a liquidator, it must be determined which entity is paying rent and honoring the other lease obligations during the GOB sale. Additionally, a landlord should consider who is responsible for maintaining insurance. Does the tenant have to account to the landlord for the GOB sales figures, and if so, when and in what form? The landlord may want to consider having the tenant account for the sales figures as a way to maintain more control over the GOB sale process.
- Maintenance of Premises How will the leased premises be maintained? This may be one of the most crucial aspects of the GOB sale from the landlord's perspective. During the GOB sale, what will be the condition of the leased premises? Who is responsible for keeping the leased premises clean and maintained? Can the leased premises be changed in any way, and if so, how? In what condition must the leased premises be returned to the landlord? Is the tenant permitted to abandon property within the leased premises after the GOB sale? If the landlord opts to allow the tenant to abandon property after the sale, he must consider who will bear the cost of removing that property in preparation for the arrival of a new tenant. Finally, the landlord should decide whether he wants to dress the store windows after the GOB sale and negotiate that into the GOB sale guidelines as appropriate.
- Choosing a Contact Person Who will be the point person for the landlord to contact in the event of an emergency or problem with the GOB sale? The landlord should make sure that he has a responsible person available at all times, whether it be the store manager or another representative of the debtor-tenant, in the event that a problem occurs.
Obviously, a tenant's bankruptcy and the resulting GOB sale can be a difficult time for a landlord. If opposed to a GOB sale, a landlord can always try to stop it through a formal court proceeding; however, as noted above, more often than not, the scales will tip in favor of the debtor-tenant. Be prepared. Consider the factors discussed herein and be ready to negotiate favorable conditions and guidelines that will allow the successful survival of any GOB sale.