May 25, 2017 News

Y. David Scharf Quoted on Strategy for Negotiating Leases in Retail Bankruptcies

May 25, 2017 - Morrison Cohen Partner Y. David Scharf is quoted extensively about strategic issues in negotiating lease terms between landlords and tenants in retail bankruptcies in the article “Going in for the Kill – Everyday Bankruptcies Bring New Business” that appeared in The Real Deal on May 17, 2017. 

“We’re seeing an uptick in litigation as well as strategic counseling and negotiation,” said Y. David Scharf, a partner at Morrison Cohen, a Manhattan law firm that represents both retail tenants and landlords. “The tensions are higher now than I recall seeing them in many, many years.”

For the tenant at risk of bankruptcy, the first strategy is to look for a broker, according to Scharf, and make a contingency plan.

“A broker will see what the market is going to bear in terms of getting replacement tenants for your leases. You may have assets in only some of these leases, and certain locations may be liabilities,” he said. “If there’s going to be a bankruptcy, you’ll have to make decisions very early on, which leases you’re assuming and which ones you’re rejecting.”

Next, with the broker, the retailer will want to engage its landlords and try to renegotiate lease terms.

“Very often landlords will want to negotiate some kind of arrangement or discount because of the concern that if one tenant leaves and then another leaves, other tenants have an opportunity to legally cancel their lease,” Scharf explained. “So very often the larger tenants have leverage over landlords.”

His firm was recently tapped by Kenneth Cole to represent the designer in a lawsuit filed by Simon Property Group, which sought to keep 43 outlet stores open after Cole made the decision to shutter them.

There are several strategic issues that arise in the case of closures, the attorney said. An empty or dark store obviously looks bad for mall operators, so they’ll likely invoke contractual obligations such as the “go-dark provision,” which says a tenant cannot cease operations at an ongoing lease.

In that case, however, a tenant may choose to “dress the window” and keep the light on but still halt the operation of the store, Scharf said. This tactic satisfies the obligation, but landlords hate it, which gives tenants a window for negotiating concessions on rent or other accommodations.

When a tenant leaves, the landlord’s biggest fear is a domino effect — with tenants leaving one after another. This means that it must “consider providing concessions and abatements to keep [the store] operating…even if it means forgiving past rent,” Scharf said.