1. TENANT BANKRUPTCY Presented by GARY S. KESSLER KESSLER & COLLINS, PC 5950 SHERRY LANE, SUITE 222 DALLAS, TX 75225

2. GOALS  Obtain control of space  Determine amount and type of claim – whether to pursue or seek termination by Debtor  Stay on top of the case and in front of the Debtor

3. LANDLORD  Creditor  Provider of Services after Filing  Holder of Unexpired Lease  Special Claim Rules  Storage Company

4. 10.If the tenant/debtor can, it will ignore the landlord. The landlord must make itself visible at the earliest possible time and throughout the case. 9.The goal of bankruptcy is to rehabilitate or liquidate a debtor and apportion its assets to creditors. 8.A bankruptcy does not necessarily make a bad tenant a good tenant. It just puts a little more teeth into the remedies a landlord might have to encourage the tenant to perform the lease properly. 7.A secured landlord is better off than an unsecured landlord. A subordinated landlord is still better off than an unsecured landlord. 6.Bankruptcy is like a multi-ringed circus. What happens in one ring affects the whole show. The landlord should be visible in as many rings as possible to be taken seriously. TOP TEN THINGS TO REMEMBER TO MAKE A LANDLORD’S LIFE LESS STRESSFUL IN A TENANT BANKRUPTCY

5. 5.The automatic stay means exactly what it says. A creditor cannot try to collect pre-petition debts or interfere with the property of the debtor. 4.The tenant/debtor’s property includes anything having to do with the lease. The debtor’s property is also “property of the estate.” It must be preserved for the benefit of the tenant/debtor and the creditors. 3.Notwithstanding the automatic stay, the landlord does have remedies as long as it files appropriate motions and/or the issue is handled through the attorneys. 2.A proof of claim will only get a landlord in the front door. There still must be assets to fund payment of the claim and the landlord must prove damages. 1.Try to look at bankruptcy as an opportunity to turn a bad situation into a better one. TOP TEN THINGS TO REMEMBER TO MAKE A LANDLORD’S LIFE LESS STRESSFUL IN A TENANT BANKRUPTCY

6. SAFE LEASING: CLAUSES FOR THE BANKRUPTCY CONSCIOUS  Security Deposits  Lease Guaranties  Letters of Credit

7. SAFE LEASING: CLAUSES FOR THE BANKRUPTCY CONSCIOUS  Recapture Provisions:  Assignment and Subletting  Landlord Remedy for an Event of Default  Event of Default/Bankruptcy – Ipso Facto Clauses  Notice Clauses  Landlord’s Liens  Subordination of Landlord’s Liens

8. FIVE STEP PROGRAM  How much rent is owed and what is our risk?  What does the lease look like?  How does the lease compare to market?  What information is available to us?  Make a business decision!!!

9. EVALUATE LEASE  Do we have a Landlord’s lien – statutory or contractual?  Do we have a letter of credit or guaranty?  Does Tenant own the “fixtures?”  Whose obligation to remove them?

10. EVALUATE OPTIONS  Tenant is in trouble – what do we do?  Renegotiate Lease? Obtain Recapture Clause Clean up fixture issues Eliminate notice provisions Obtain a release Obtain additional collateral Letter of credit Guaranty

11. TERMINATE LEASE?  Below Market Lease  Worried about assumption and assignment  Not “caught up” in the bankruptcy proceeding  If space is essential, you can get some leverage

12. FIRST 60 DAYS  First Day Motions  Motion for Approval of DIP financing  Motion to use cash collateral  Motion to extend time to assume or reject lease  Notice from Court  Date filed  Date of Section 341 hearing  Bar Date

13. 341 Creditors Meeting  Short meeting (15 minutes to one hour)  Presiding officer is Trustee  2004 Examination  Meeting may be continued  Tapes are available

14. PREVENTS ANYONE FROM INTERFERING WITH DEBTOR’S PROPERTY OR EFFORTS TO REORGANIZE Includes:  Commencement or continuation of lawsuit  Enforcement of judgments (monetary or otherwise)  Obtaining possession of property of estate  Collection efforts  Set off of debts

15. STAY’S EFFECT ON LANDLORD/TENANT RELATION You cannot:  Evict tenant  Lockout tenant  Seize tenant’s property  Shut off utilities  Show property to prospective tenant  Apply security deposit  Hinder operation of debtor’s business  Change locks  Give eviction notice  Terminate lease  Declare a default  Threaten tenant  Move property of a tenant that has vacated

16. STAY’S EFFECT ON LANDLORD/TENANT RELATION You Can:  Collect rent and other charges which have accrued since bankruptcy filing  Draw down letter of credit  Take action to continue a security interest in property  Take action to remove tenant whose lease has expired by its own terms prior to or during the bankruptcy case (this should be done carefully)

17. ASSUMPTION OF A LEASE  Test is business judgment  Priority claim if rejected after assumption  Three part test  Cure or provide adequate assurance of prompt cure  Compensate or provide adequate assurance of compensation for pecuniary loss  Provide adequate assurance of future performance

18. SHOPPING CENTER AMENDMENTS  Must provide adequate assurance of source of rent and show that financial condition and operating performance of assignee shall be similar to financial condition of operating performance of debtor at time of lease  Percentage rent will not decline substantially  Assumption or assignment is subject to all provisions in the lease including radius, use, location and exclusivity and will not breach any other lease agreement  Not disrupt tenant mix

19. HOT ISSUE REGARDING ASSIGNMENT  Designation Rights

20. IMPORTANT EXCEPTIONS TO ASSUMPTION AND ASSIGNMENT  Cannot assign:  If applicable law excuses Landlord from accepting performance from any entity other than Debtor  If Landlord extended financial accommodation to Debtor  If lease terminated prior to bankruptcy

21. WHY FILE A CLAIM?  Only way to get paid  Previous suits, judgments, awards, etc. Make no difference

22. LANDLORD CLAIMS  Secured – Extent defined by lease.  Unsecured – Most common  Administrative – Post-petition expense. Highest priority  Prior to rejection  After rejection  “STUB RENT” Issue  Property Tax / Expenses – Pro-rated  Environmental – Did claim arise pre-petition or post- petition?

23. THE LANDLORD CLAIM CONTINUUM General Claim vs. Estate or Secured Claim Depending on Lease Language Filing of Bankruptcy Administrative claim per rent reserved in lease until rejection when claim is measured by benefit to the estate Assumption: Must cure all defaults and lease continues as before Rejection: -Constitutes breach of lease from date of filing. -General claim or secured claim depending on lease. -Claim capped at greater of: (1)one year's rent or (2)15% of rent for remaining term of lease (3 year cap)

24. CALCULATION OF “REJECTION DAMAGES”  Calculate whatever damages are for breach under the lease  Cap the damages at equivalent of one year’s rent reserved in lease Or  Cap the damages at the rent reserved for 15% of the remaining time under the lease not to exceed three years i.e., (10 years x 15% = rent for 1.5 years) (7 years x 15% = rent for 1.05 years) All amounts are subject to mitigation if new tenant takes possession

25. CHAPTER 11 PLAN  Disclosure Statement  Voting  Confirmation  Cram Down

26. SOURCES OF PAYMENT  Post confirmation operations of debtor  Sale of property  Recoveries from lawsuits filed on behalf of estate  Fraudulent conveyances  Preferences  Turnover suits  Business tort and related suits

27. EXCEPTIONS TO PREFERENCE  Intended to be a contemporaneous exchange for new value and was a substantially contemporaneous exchange  Debt incurred in the ordinary course of business of the debtor and the transferee, made in the ordinary course of business and made according to ordinary business terms

28. EXCEPTIONS TO PREFERENCE  If a security interest, it:  Secures new value that was given to the debtor to acquire the property and  Was used to acquire the property and  Was perfected within 20 days after the date the debtor received the property