Under title 11 of the United States Code (the “Bankruptcy Code”), a debtor filing for bankruptcy with an executory contract or unexpired lease will be relieved of their obligation under that contract or lease when it is properly assumed and assigned to a third party with court approval. Section 365(b) mandates that the debtor meet certain requirements to assume a contract or lease, which includes providing adequate assurance of future performance.
Section 365(b)(3) governs the assumption and assignment for debtor-tenants located in shopping centers. Section 365(b)(3) enumerates heightened requirements in providing adequate assurance in order for the debtor-tenant in a shopping center to be released from their obligations and avoid breach of the lease; these include:
(A) adequate assurance of the source of rent and other consideration due under such lease, and in the case of an assignment, that the financial condition and operating performance of the proposed assignee and its guarantors, if any, shall be similar to the financial condition and operating performance of the debtor and its guarantors, if any, as of the time the debtor became the lessee under the lease; (B) that any percentage rent due under such lease will not decline substantially; (C) that assumption or assignment of such lease is subject to all the provisions thereof, including (but not limited to) provisions such as a radius, location, use, or exclusivity provision, and will not breach any such provision contained in any other lease, financing agreement, or master agreement relating to such shopping center; and (D) that assumption or assignment of such lease will not disrupt any tenant mix or balance in such shopping center.
Assignment is impermissible if any of the subsections of 365(b)(3) are not met.
This memorandum will examine section 365(b)(3) of the Bankruptcy Code and its implications. Part I will briefly examine the term “adequate assurance.” Part II will focus on the requirement of adequate financial condition and rent stabilization under section 365(b)(3)(A), (B). Part III will evaluate the requirement of compliance with lease provisions and agreements within shopping centers and the overt tension between section 365(b)(3)(C) and section 365(f)(1). Part IV will assess the requirement of avoiding disruption of the tenant mix and balance in the shopping center in section 365(b)(3)(D).