Lease renewal limit may force struggling retailers to shut down, NRF
NRF Senior Vice President and General Counsel Mallory Duncan
The National Retail Federation asked Congress to repeal a four-year-old law limit on the amount of time in which retailers trying to reorganize under bankruptcy protection must decide whether to keep leases on their stores, saying the requirement can force struggling merchants out of business prematurely.
“As now written, the law limits the bankruptcy court's discretion to the point that it has become more difficult for retailers to successfully emerge from Chapter 11,” NRF Senior Vice President and General Counsel Mallory Duncan said. “For businesses and workers, the consequences of this change are devastating. From the sales floor to the executive suite, one in every five U.S. workers is employed in the retail industry. At anytime, but particularly during times of economic stress, preserving those businesses and jobs is important.”
Duncan's comments came in a letter to the House Judiciary Committee's Subcommittee on Commercial and Administrative Law, which held a hearing this afternoon on “Circuit City Unplugged: Why Did Chapter 11 Fail to Save 34,000 Jobs?”
Prior to 2005, retailers seeking to reorganize under Chapter 11 of the bankruptcy code initially had 60 days to decide whether to take advantage of rules allowing them to cancel their leases early, and bankruptcy judges had discretion to extend the period indefinitely. The judicial discretion was important because retailers in Chapter 11 typically need a number of months to develop a reorganization plan that includes decisions on which stores are profitable and should be kept and which to close. They then need a year or more to see whether the remaining stores have been profitable, and whether they need to close additional stores.
Under Congress's 2005 update of bankruptcy laws, however, landlords successfully lobbied for a 210-day limit, with no judicial discretion to extend the period. Retailers who don't close a store within the time period are now locked into whatever lease was in effect prior to the bankruptcy, and might have to continue paying a landlord for years on a store they later decide to close. Any decision to let the retailer out of the lease early is up to the landlord rather than the bankruptcy judge.
Duncan said the limit can force a retailer to close a story early rather than being able to keep it open long enough to see how it will perform during crucial periods in their annual business cycles, such as the holiday season for clothing stores or perhaps the Super Bowl – a time when electronics retailers like Circuit City would typically see a spike in television sales. Without flexibility, some companies that might have survived reorganization could be forced to go out of business, he said.
“For a reorganization plan to be realistically vetted, it must be tested during that critical period,” Duncan said. “If at the end of the test period the plan proves successful, underperforming leases are canceled, performing leases are extended, and the retailer emerges from Chapter 11 with its business and often tens of thousands of jobs intact. Landlords, of course, continue to be paid throughout this process. But by greatly shortening the time period and removing the court's discretion, the new law inadvertently dooms reorganizations to failure.”
Duncan asked that Congress repeal the 210-day limit and return to the earlier 60-day limit with the option for extensions. Short of that, the 210-day limit should be extended to at least one year, he said.
National Retail Federation