Doug Goldstein, Attorney at Law Useful tips for businesses and individuals in a creditor/debtor relationship

As a flexible workspace provider, WeWork relies on commercial landlords for its survival. WeWork rents space from these landlords and then rents or sublets that space to its customers. So, what happens to WeWork’s commercial landlords in a bankruptcy case? Let’s explore a few scenarios:

1. Lease Rejection:  In bankruptcy, lease rejection allows the debtor (WeWork) to break a lease without the associated ramifications.  The debtor can limit or avoid paying rent that came due before the bankruptcy filing, as well as rent owed for the period after the debtor vacates, or ceases to benefit from, the premises.  The affected landlord still has remedies.  The landlord can pursue a rent claim based on the debtor’s continued benefit and occupancy of the premises.  Also, the landlord can pursue a claim for its lease rejection damages, up to a capped amount.
2. Lease Assumption:  If the debtor wishes to keep a lease, the debtor can ask the bankruptcy court for authority to assume the lease.  If authorized by the court, the debtor can keep the lease and possession of the premises, subject to the lease terms.  Despite the powerful remedies in bankruptcy, the debtor may not change the lease terms without the landlord’s consent.  The Bankruptcy Code offers several opportunities for the landlord to challenge lease assumption – a bankruptcy attorney can advocate for the landlord and protects its rights.
3. Lease Assumption and Assignment:  Similar to no. 2 above, the debtor can ask the bankruptcy court for permission to assume the lease, and to assign the lease to a new tenant.  With some exceptions, even if a lease contains an anti-assignment clause, the lease can be assigned in bankruptcy.  The landlord will want to conduct due diligence into the proposed tenant and may have grounds to challenge the assignment.  A bankruptcy attorney can advocate for the landlord and, where appropriate, defeat the assignment.

WeWork has not yet publicly identified the leases and contracts that it wishes to assume.  The Bankruptcy Code gives the debtor until the earlier of:

• 120 days from the date of its bankruptcy case filing, or
• the entry of an order confirming a chapter 11 plan,

to assume a lease of nonresidential real estate.  If the debtor needs additional time and shows cause, it can seek a 90-day extension of that deadline.

As of this writing, WeWork has proposed streamlined procedures for the assumption or rejection of leases and contracts, and it awaits the bankruptcy court’s consideration.