On November 6 and 7, 2023, WeWork and more than 500 affiliated companies filed for bankruptcy under chapter 11 of the Bankruptcy Code.
Founded in 2010, WeWork describes itself as the leading global flexible space provider committed to delivering technology-driven turnkey solutions, flexible spaces, and community experiences.
What happened? As WeWork explains in court filings, the culprits for its financial woes were, among other things, rising interest rates, a changing commercial real estate landscape, a slower-than-expected return to the office, and customer attrition. That’s a lot to go wrong. To be fair, who could foresee those problems before COVID-19? The bankruptcy cases and a carefully planned strategy together can make everything better.
What does WeWork hope to accomplish in bankruptcy? As WeWork explains, “WeWork has a deliberate and value maximizing lease rejection plan that is expected to position the company for operational and financial success. … WeWork is requesting the ability to reject the leases of certain locations, which are largely non-operational and all affected members have received advanced notice.”
In other words, WeWork’s 2023 bankruptcy might resemble Kmart’s 2002 bankruptcy: Kmart closed stores, broke leases and emerged strong enough to acquire Sears (as long as WeWork does not acquire a modern-day Sears, maybe things will work out). Typically, when a tenant breaks a lease, the lease likely entitles the landlord to pursue the unpaid rent owed for the remainder of the lease term. If a lease has 5 years left, that’s a lot of rent. By rejecting leases in bankruptcy, WeWork can escape the obligation to pay the remaining rent.
Will the bankruptcy case work for WeWork? Here’s a preview (and watch for more): WeWork and its companies started their bankruptcies with $164 million in cash. They forecast that, after 13 weeks, they will have spent all but $45 million. If WeWork does not improve its cashflow during weeks 14-26, this could be a bumpy ride for the commercial landlords leasing space to the WeWork companies. Fortunately for the landlords, there are steps they can take to protect themselves. Still, certain self-help remedies are off limits for the landlords.
More on that in my next post!
Doug Goldstein, Attorney at Law 