In today’s distressed retail market, the possibility of a tenant’s bankruptcy is a top concern for managers and owners of retail centers. Owners of commercial office buildings in many parts of the country are becoming increasingly concerned about tenant bankruptcies, too. Landlords need to know the options available when a tenant files for bankruptcy and should anticipate a tenant/debtor’s likely maneuvers in bankruptcy. This article provides a summary of relevant law and key strategic considerations to help landlords minimize losses and protect their interests when a tenant files bankruptcy.

Leases & “Executory Contracts”

Section 365 of the Bankruptcy Code allows a debtor (i.e., an entity that has filed for bankruptcy) to either assume or reject an executory contract or unexpired lease. This way, a debtor may decide to assume any valuable contracts and reject any burdensome ones. If a bankruptcy tenant decides to assume an unexpired lease, the lease will remain in effect through and after completion of a Chapter 11 reorganization. Assuming the lease does not mean the tenant gets to stay in the space free of charge. The tenant must cure any outstanding defaults and perform all pending obligations in the lease.
 

When a tenant files bankruptcy, its unexpired lease, as well as the tenant’s other executory contracts, remain in existence and enforceable by, but not against, the tenant-debtor. This remains so until the tenant decides to assume or reject the lease. If the tenant remains in possession of the lease space pending a decision to assume or reject the contract, the tenant must pay for that privilege. Bankruptcy courts may adjust the lease’s rent price to a new “reasonable value” payment in certain circumstances.

Time Period for Assumption/Rejection

The 2005 amendments to the Bankruptcy Code shortened the time limit for a commercial tenant to decide whether to assume or reject a lease. This change is welcome news for landlords who were frustrated with the prior law, which many people thought gave bankrupt tenants an almost endless right to remain in place without paying rent. Under current law, a tenant in bankruptcy is deemed to have rejected its lease unless it formally assumes the lease within 120 days of the date bankruptcy is filed. The court may order only one 90-day extension; any subsequent extension requires the landlord’s consent.

Procedure for Assumption or Rejection

If your bankrupt tenant indicates that it wants to assume the lease, get it in writing. Moreover, get court approval. Best practices require the landlord and tenant to agree in writing on all back-rent, late charges, and other fees to be brought current; any changes to the lease’s terms; and any side agreements. This written agreement should be submitted to the bankruptcy court for approval, either as part of the tenant’s reorganization plan or by a separate motion.

The Easier Path: Terminate the Lease Before Bankruptcy

One way to avoid the uncertainty of whether your tenant is going to assume or reject its lease is to terminate the lease before the tenant files for bankruptcy. Most retail tenants will send signals of their financial distress before filing for bankruptcy: late rent payments, requests to make payment in installments rather than on the date it is due, inquiries from the tenant’s lender or trade creditors asking if you have had any problems with the tenant, to name a few. If you receive a percentage of sales in rent, a quick historical analysis might show how the tenant’s current sales compare to historical periods; a significant decline in revenue should prompt you to review the lease. News reports about your tenant or your tenant’s industry may also be an indication of trouble on the horizon.

If the rent is late or you perceive that your tenant is in distress, review the lease’s terms regarding tenant defaults. Is the tenant in default? If so, provide notice of the default and wait any required cure period. If the default is not cured, or if no cure period is required, consider terminating the lease.

Landlords are sometime hesitant to terminate a lease because they would rather have a slow-paying tenant than dark space. Keep in mind that terminating the lease is different than evicting the tenant. Most leases allow for a tenant to remain in possession of the leased space after the lease is terminated on a month-to-month basis. If the tenant files Chapter 11, it is much easier to evict a month-to-month tenant than it is to evict a tenant whose lease is in effect and enjoys all the lease-related protections afforded by the Bankruptcy Code. Even if you prefer not to evict the tenant, the fact that you have the legal right to do so will help you in negotiations for new lease terms.

In the aftermath of Hurricanes Gustav and Ike, homeowners filing flood insurance claims under the National Flood Insurance Program’s (“NFIP’s”) Standard Flood Insurance Policy (“SFIP”) should exercise extreme caution to avoid running afoul of the SFIP’s Proof of Loss requirement.

SFIP policies require that insureds asserting a claim file a Proof of Loss within 60 days, subject to such extensions as FEMA may approve, listing “the actual cash value of each damaged item of insured property, the amount of damage sustained, and the amount claimed as due under the policy to cover the loss."

Courts have consistently enforced this requirement in an extremely strict and severe manner, holding that failure to timely file a Proof of Loss complying with the regulatory requirements is a valid basis for denying an insured's claim. If the policyholder does not strictly comply with the Proof of Loss requirement, the policyholder may not file suit to recover under its SFIP. That the insured's losses are covered under the policy is irrelevant. The conduct of the insurer/adjuster in adjusting the claim is irrelevant. Timely filing a proper proof of loss is essential to filing suit under the SFIP.
 

This extension applies to all claims for flood-insured buildings in the States of Alabama, Arkansas, Louisiana, and Mississippi damaged by flood resulting from Hurricane Gustav (dates of loss August 31, 2008, and continuing); and in the States of Alabama, Arkansas, Florida, Illinois, Indiana, Kansas, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Ohio, Oklahoma, Tennessee, and Texas damaged by flood resulting from Hurricane Ike (dates of loss September 13, 2008, and continuing). The extension applies whether the SFIP was issued directly by the NFIP Servicing Agent or through one of the private insurance companies issuing flood insurance coverage under the Write Your Own ("WYO") Program.

An NFIP policyholder who incurred a Gustav-related flood loss on August 31, 2008, would normally have until October 30, 2008, to submit the proof of loss. With the extended deadline, the same policyholder now has until February 27, 2009, to submit the proof of loss. Similarly, an NFIP policyholder who incurred an Ike-related flood loss on September 13, 2008, would normally have until November 12, 2008, to submit the proof of loss. With the extended deadline, the same policyholder now has until March 12, 2009, to submit the proof of loss. In either case, eligible policyholders will be allowed a total of 180 days to submit the proof of loss.

The formal requirements for filing a Proof of Loss are set forth in Article VII(J)(4) of the SFIP. Within 60 days after the loss, insureds are directed to send a proof of loss, which is a statement of the amount claimed under the policy signed and sworn to, and which furnishes the following information:

• The date and time of loss;
• A brief explanation of how the loss happened;
• Interest (for example, “owner”) and the interest, if any, of others in the damaged property;
• Details of any other insurance that may cover the loss;
• Changes in title or occupancy of the covered property during the term of the policy;
• Specifications of damaged buildings and detailed repair estimates;
• Names of mortgagees or anyone else having a lien, charge, or claim against the insured property;
• Details about who occupied any insured building at the time of loss and for what purpose; and
• The inventory of damaged personal property described

The insurance carrier-whether it be the federal government or the private WYO carrier-may hire an adjustor to investigate the SFIP claim. The adjustor may help the insured complete the Proof of Loss form. Be forewarned, however-neither the WYO carrier nor the adjustor is authorized to waive the proof of loss requirement. There are numerous SFIP cases in which WYO carriers notified SFIP policyholders verbally or in writing that the proof of loss requirement was waived, but in which coverage was nonetheless denied for failure to comply with the Proof of Loss requirement. For example, in Wright v. Allstate Ins. Co., coverage was denied for failure to comply with the proof of loss requirement despite a letter from the WYO carrier stating that “we are accepting this proof in compliance with the policy conditions concerning the filing of a Proof of Loss.”

Simply put, the policyholder will be held to the terms of the SFIP and its Proof of Loss requirement regardless of statements to the contrary by the WYO carrier or claims adjustor. Only FEMA may waive the proof of loss requirement. No matter what they say or do, neither the WYO carrier nor the adjustor may waive the proof of loss requirement. The SFIP policyholder may not rely on spoken or written waivers of the proof of loss requirement by any party other than FEMA.

Finally, if you are uncertain about whether the September 19, 2008 FEMA extension of the Proof of Loss deadline applies to your claim, or if you are uncertain as to how to comply with the Proof of Loss requirements, you should seek the advice of an attorney.
 

Most commercial leases for multi-tenant properties contain clauses which regulate the tenants' use of the leased premises. Many tenants will require a landlord to grant the tenant the exclusive right to operate a certain business or sell a certain product to avoid competing with other tenants. These provisions are appropriately referred to as exclusive use clauses. For the landlord to satisfy its obligations under an exclusive use clause of one lease, the landlord is required to incorporate provisions in its other leases prohibiting the other tenants from using the leased premises for the restricted purpose. These clauses are commonly referred to as prohibited use clauses. 

A tenant being able to negotiate an exclusive use provision in the lease can have a significant impact on the financial success of the business. However, landlords will be hesitant to grant an exclusive use if it will limit the landlord's ability to rent the other locations on the property. If a landlord does grant an exclusive use, the landlord must be prepared to incorporate corresponding prohibited use clauses in the leases of all of the other tenants. 

Download the full outline here.

For more information, contact a member of the Kean Miller Business and Corporate team, or send an email to client_services@keanmiller.com.

Very often, contracts prohibit assignment without the other party's consent. If you think you might ever want to assign a contract (bearing in mind that a merger or sale of the business can trigger assignment), then this kind of provision should generally be modified by adding that the other party's consent cannot be unreasonably withheld, conditioned or delayed.

Adding the language recommended above will require the other party to demonstrate some legitimate reason for denying consent, such as the proposed assignee is financially inferior to the assignor; the assignor is in default; or the proposed assignee cannot comply with the existing terms of the subject agreement.

In a recent case, the court found that a landlord withholding consent for competitive reasons was not reasonable (i.e. the proposed assignee would be operating a business competitive with the landlord's nearby business). Tenet HealthSystem Surgical, L.L.C. v. Jefferson Parish Hosp. Service Dist. No. 1, 426 F.3d 738 (5th Cir. 2005). The court noted that the landlord's objection must be based on ownership and operation of the leased property, not the landlord's "general economic interest." The court held that the competitive concerns did not relate in any way to an objective evaluation of the proposed assignee as a tenant and were not a reasonable basis for denying consent. This is the first time Louisiana contract law has been interpreted in this fashion. Historically, economic reasons were a permitted basis for refusing consent to assignment.

Avoid becoming trapped into contracts, including leases, by making sure the other party must act reasonably if you need to request consent to assignment. On the flip side, be aware that if your consent to assignment is requested, refusing to grant it for competitive reasons may trigger a claim that you've breached the contract. Whether you can successfully defend such a claim will depend largely on the wording of the assignment provision and whether it expressly permits withholding consent for competitive reasons.

Reproduced with permission from Class Action Action Litigation Report, Vol. 6, No. 21, pp. 795-797 (Nov 11, 2005). Copyright 2005 by The Bureau of National Affairs, Inc. (800-372-1033). http://www.bna.com

The damages caused by Hurricane Katrina in Louisiana, Mississippi, and Alabama constitute the largest natural disaster in U.S. history. Hurricane Katrina's impact on insurers and their policyholders have already set in motion what will probably be one of the largest legal and public policy storms to hit the United States in modern times. Nowhere will the storm be more evident than in disputes involving wind and water damage coverage.

The eye of the coverage storm is already manifesting itself in coastal areas of Louisiana, Mississippi, and Alabama.

Read the entire article here: Download file

Many businesses in Louisiana are now assessing how Hurricane Katrina and Hurricane Rita have affected and will continue to affect their contracts with clients, vendors, partners, and others. This article provides some general guidelines that businesses can use to determine if and how their contracts' terms or Louisiana's commercial law may affect contractual rights and obligations in light of the hurricanes.

The first step in assessing how the rights and duties in a given contract may be affected by Hurricane Katrina is to review the contract itself. Does the contract contain a provision that states if and how the parties' obligations change in the event of a hurricane or flood? If the answer is yes, then a party should follow the terms provided in the contract. If a party is unable or unwilling to abide by the contract's terms, it should contact the other parties as soon as possible about amending the agreement to avoid potential liability for breach.

We never thought about a hurricane . . . . Now what?

Many contracts, however, do not have a hurricane or force majeure clause. Business looking for guidance about their contractual rights and obligations in light of Hurricane Katrina and Hurricane Rita should consult with legal counsel about how Louisiana Civil Code Articles 1873-1878 ("The Articles") apply to their particular situation. The Articles provide the default rules about how contractual obligations may be modified or extinguished due to a "fortuitous event" that has made performance of a contract "impossible," either in part or in whole. The Articles only apply, however, if the parties themselves did not address how a hurricane or other force majeure would affect their obligations to each other.

What happens to my contract if we [or they] cannot perform because of Katrina or Rita?

Under the Articles, when a fortuitous event makes the entirety of a party's owed performance impossible, the contract is dissolved. If the fortuitous event makes a party's owed performance impossible in part, a court may either reduce the counterperformance proportionally, such as by a reduction in the contract price, or it may declare the contract dissolved, according to the circumstances. The court should uphold the contract if one party's partial performance will still be of value to the other party after a reduction in the other's counterperformance.

For example, assume Seller contracted to deliver 1000 widgets to Buyer. If Seller is able to deliver only 500 widgets because part of its inventory was destroyed in the hurricane, and Buyer is willing to accept 500 widgets at the agreed per-widget price, then the contract should be reformed and upheld to allow the sale. If partial performance by one party would be of no value to the other party, however, the court should dissolve the contract. In our example, if Buyer needs a minimum of 1000 widgets for the cost and hassle of shipping to be worthwhile, then the contract should be dissolved.

Am I liable for breach if I do not deliver as promised? [ Or: Is my supplier liable for breach if he does not deliver as promised?]

An obligor is not liable for its failure to perform an obligation when the failure is caused by a fortuitous event that makes performance impossible. If the fortuitous event has made impossible the entire performance owed by at least one party, the contract is dissolved by operation of law. When a contract is so dissolved, a party who has partially performed its obligations may recover any performance that it has already rendered. If a contract is dissolved because of a fortuitous event that occurred after an obligor rendered partial performance, the obligee is bound only to the extent that he was enriched by the obligor's partial performance. For example, where a land owner agreed to pay a set price for having his acreage mowed regularly, but soon thereafter much of the acreage flooded and could not be mowed, the contractor was entitled to receive payment in proportion to the acreage that he mowed during the time period established by the contract, but he was not entitled to receive the contract's stated price for mowing the entire property. See McQuillin v. Meier, 27,099 (La. App. 2nd Cir. 6/21/95), 658 So. 2d 238.

Is Hurricane Katrina a "Fortuitous Event" under The Articles?

A fortuitous event is one that could not have been reasonably foreseen at the time the contract was made. Conflict will occur when parties disagree over whether the flooding or other damage from Hurricane Katrina and Hurricane Rita was reasonably foreseeable when they made their contract. There is some authority stating that hurricanes are, ipso facto, fortuitous events, and therefore not reasonably forseeable. See Popich v. Fidelity and Deposit Co. of Maryland, 231 So. 2d 604, 613 (La. App. 4th Cir. 1970), jdgmt amended, 258 La. 163, 245 So. 2d 394 (1971) (the court states that damage to a house from Hurricane Betsy was a fortuitous event). It seems unlikely, however, that such an across-the-board rule will apply in every case. If the parties' agreement indicates that they foresaw the risk of a hurricane or flooding, then Katrina was not a fortuitous event as to that contract. In such a situation, the parties' contract will not dissolve and the obligor will remain liable for damages arising from its failure to perform. That the obligor's performance is now impossible due to the hurricane will not relieve it of liability for breach.

One leading case on the forseeability of a natural event involves a contract dispute between the Sewarage & Water Board of New Orleans ("the Board") and a contractor hired by the Board to expand a pumping station in New Orleans. See Farnsworth v. Sewarage & Water Board of New Orleans, 173 La. 1105, 139 So. 638 (1932). The contract stipulated a date certain for the project to be completed. The contract also provided for delay damages of $25 per day if the project was not completed on time. The project was delayed due, in part, to excessive and unprecedented rainfall in New Orleans. The Board charged delay damages as stipulated in the contract. The contractor argued that the unprecedented rainfall was a fortuitous event, and that he should not be penalized for any delay due to the rain and subsequent flooding. The Louisiana Supreme Court found that the rainfall during the 10 month period for completion of the work was "abnormal;" the opinion refers to newspaper photographs of canoes in flooded streets with a caption stating, "It looks like Venice, but it's New Orleans." Farnsworth, 130 So. at 641. The Court distinguished between the 10 months of excessive rainfall and the few days of actual flooding in the city. The Court found that the contractor assumed the risk of the excessive rains, presumably by agreeing to the completion date and delay damages stated in the contract (although the court's rationale is not explicitly stated). The contractor could not avoid delay damages by claiming that the rains were a fortuitous event. The contractor, however, did not assume the risk of floods. The Court held that the floods were a fortuitous event, and that the contractor was not liable for any delay due to floods that made it impossible to work in New Orleans. The Court's distinction between the rains and the flood caused by the rains may be useful for business seeking analogies for their particular situations.

When is Performance of an Obligation "Impossible?"

A fortuitous event will only relieve a party of its obligation when the obliged performance is truly impossible. A fortuitous event that makes an obligation more difficult or more burdensome does not qualify. See Dallas Cooperage & Woodenware Co. v. Creston Hoop Co., 161 La. 1077, 109 So. 844 (La. 1926). If a party cannot satisfy an obligation as anticipated due to a fortuitous event, it should seek substitute goods or services in the market that it can use to render the obliged performance. For example, in the Dallas Cooperage case, the defendant was contractually obligated to deliver coiled elm hoops to the plaintiff. The defendant admitted its obligation and that it defaulted on that obligation. The defendant argued, however, that it was prevented from fulfilling its obligation by a fortuitous event: unfavorable weather conditions that made it impossible to obtain elm logs and manufacture hoops. The Court disagreed:

"The contract was not impossible of fulfillment, and, if defendant was unable to manufacture the hoops at its own mill, it should have procured them from other manufacturers or dealers in the same line of business. The nonperformance of a contract is not excused by a fortuitous event where it may be carried into effect, although not in the manner contemplated by the obligor at the time that the contact was entered into."

As another example, the above language was cited in a recent case where a limousine service attempted to avoid liability for failing to pick up a bride on her wedding day by claiming that its failure was the result of a fortuitous event. West v. Central Louisiana Limousine Serv., Inc., 2003-373 (La. App. 3rd Cir. 10/1/03), 856 So. 2d 203, 205. The court noted that the Code places a high standard on an obligor and requires an obligor to search for alternatives that will satisfy its obliged performance when its anticipated method of performance becomes impossible. The court upheld the trial court's determination that defendant failed to meet its burden of proving impossibility because the limousine service failed to present evidence that it took any action to locate a substitute limousine for the plaintiff after it knew that it would not be able to provide its own limousine for the plaintiff. In sum, if a party does not at least attempt to locate a substitute good or service that could fulfill its contractual obligation, it may be unable to prove that a fortuitous event made performance of the obligation impossible.

Importantly, mere "economic impossibility" arising from a fortuitous event will not extinguish an obligation. For example, a homeowner in St. Bernard Parish hired a contractor to construct an addition to his home. Before substantial work had been done on the addition, Hurricane Betsy hit the area. The home was "inundated by flood waters to a height of approximately 5 feet 7 inches." Schenck v. Capri Constr. Co., 194 So. 2d 378, 379 (La. App. 4th Cir. 1967). The homeowners sought to cancel the contract. They argued that Hurricane Betsy was a fortuitous event that made their obligation to pay the amount owed under the contract "economically impossible." The record, however, showed that the house was still structurally sound and that the addition was possible from a structural, engineering, and architectural standpoint. The Court found that the hurricane damage made the homeowners' obligation to pay the contractor more difficult, but not impossible. Accordingly, the doctrine of impossibility was not available to the homeowners, and the Court enforced the contract.

Conclusion

Businesses should review any contracts that may be affected by Hurricane Katrina to see what their respective rights and obligations are in light of the storm. If a contract does not contain a force majeure, hell-or-high-water, or other clause addressing the given situation, then The Articles discussed above will apply. Whether Hurricane Katrina was a "fortuitous event" vis-�-vis a given contract, and whether performance of a contractual obligation is truly "impossible," will vary from situation to situation.

Assessors are charged with the duty of determining the fair market value of business and residential property in Louisiana so that annual ad valorem property taxes can be imposed. This duty to determine fair market value is modified by a duty to insure that assessments are uniform. That is, similar properties should have similar assessments.

In the Club New Orleans case, the Louisiana Tax Commission ordered that a New Orleans French Quarter property that sold for $1,200,000 be assessed based on a fair market value of $208,610, a 15% increase from the prior year assessment because similar properties had increased only 15% from the prior year. This decision is particularly important right now since the rolls are open in many parishes and taxpayers who have recently bought property can object to the value being increased to the sales price. Taxpayers who have purchased property since the last reappraisal (in some parishes maybe as long as four years ago) should contact their assessor to confirm that the assessor has not increased the value of their property without making uniform adjustment to other properties in the area. If an assessor does not agree to an adjustment, the taxpayer must file a timely appeal of the assessor's determination with the local Board of Review. Download a copy of the Club New Orleans decision. Click here for a copy of the Tax Commission rules regarding appeals.

For help with property and other Louisiana taxation issues contact Chris Dicharry.

In-house counsel who are employed in Louisiana but are not licensed to practice law here have until July 1, 2005 to file an application for limited licensure to practice under the Louisiana Supreme Court's new In-House Counsel Rule.

Licensure pursuant to the In-House Counsel Rule is discretionary and is not a matter of right. The license issued pursuant to this rule only authorizes the lawyer to practice exclusively for the employer filing the affidavit submitted with the application. The license is automatically terminated if the lawyer's employment with the employer filing the affidavit is terminated. If the lawyer's employment is terminated but the lawyer is immediately thereafter employed by another employer who files an affidavit, the limited license shall be reinstated. A limited license is valid for four years from the date of issuance. The limited license may be renewed for a successive four year period by filing a written application required by the Committee at least 90 days prior to the expiration of the current license. The application for renewal shall be accompanied by a non-refundable fee.

A lawyer admitted pursuant to the In-House Counsel Rule is required to pay the annual disciplinary assessment required of attorneys admitted to practice three years or more in Louisiana, and State Bar Association annual dues during the period of the limited license. The in-house counsel must also comply with the Louisiana Continuing Legal Education requirements.

If you have questions about the In-House Counsel Rule, please contact us, or the Louisiana Committee on Bar Admissions.

Who owns the improvements constructed by a tenant is often a critical issue when a lease terminates. If a lease does not address the issue, the relevant Louisiana Civil Code Articles will apply. Effective January 1, 2005, Louisiana revised the Civil Code Articles regarding leases. The revised Articles specifically address improvements made by tenants and govern if the lease is silent on the issue.

A lease should always address whether or not a tenant has the right to construct improvements and the tenant's right or obligation to remove the improvements once the lease terminates. If the lease is silent regarding the improvements, the outcome may be different from what the parties originally anticipated.

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