Publication

November 12, 2018Client Alert

Sears/Kmart Store Closings Should Spur New Economic Activity

In the wake of Sears’ pending Chapter 11 proceeding, the company has initially sought court approval to close approximately 234 stores across the U.S., including branded locations of Sears and Kmart (which merged with Sears in 2005 in a prior bankruptcy). Those stores include approximately five in Wisconsin, 11 in Illinois, four in Colorado, four in North Carolina, and five in Utah – all states in which Michael Best has offices. The Bankruptcy Court for the Southern District of New York is set to hear the matter on November 15, 2018.

Part of the store closing process includes Sears’ ability to reject leases with a landlord, pursuant to sec. 365 of the Bankruptcy Code. The rejections, if approved, allow Sears to break the leases, thereby eliminating ongoing rent payments on non-profitable stores. If you are a landlord whose lease is rejected, you may have the ability to claim rejection damages against the bankruptcy estate, or otherwise contest Sears’ pending motion. If for some reason the bankruptcy court does not approve each lease rejection, or Sears instead assumes a lease, a landlord is entitled to “adequate assurance” of Sears’ future performance of the lease; Sears would also need to cure any defaults related to an assumed lease.

Although rejection of a lease means landlords of those leases will no longer receive rent, in this case, many of Sears’ lease agreements are below current market rates. Many of these leases, which date back over four or five decades ago, contain terms that are rather unfavorable for landlords due to Sears’ historically substantial bargaining power. Additionally some of these locations have been “dark” for some time, negatively impacting the viability of other neighboring tenants. As such, landlords may actually benefit by the rejection of these leases, allowing landlords to re-rent the space at substantially higher rents, and on better terms, or free up these buildings to take advantage of new development opportunities. 

Often these closed “dark” stores stood in the way of development of a whole area. Further, some of these locations may be located within one of over 9,000 federally designated economic Opportunity Zones, which were created by the Tax Cuts and Jobs Act of 2017. Investors can defer current capital gains by investing in one of these Opportunity Zones through a Qualified Opportunity Fund. We expect to see new opportunities for property owners and investors in the wake of Sears, and other recent retail bankruptcies.

If we can help guide you through the bankruptcy process of protecting your interest in a Sears or Kmart lease or other bankruptcy matters, contact Justin Mertz. If you need more information about Opportunity Zones, visit our team webpage.

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