Most courts have resolved the perceived conflict in favor of the tenant by holding that the specific protections set forth in section h prevail over the more general sale rights provided in f. The Spanish Peaks court concluded sections f and h are not inherently at odds. In doing so, the court pointed out the different scopes and purposes of the two provisions and emphasized the importance of giving effect to both, observing that where there is a sale, but no rejection or a rejection, but no sale , there is no conflict between the two.
Based on the rationale of the Qualitech and Spanish Peaks decisions, tenants in commercial spaces owned by landlords in financial distress are at risk of having their leasehold rights extinguished if the property owner files bankruptcy, notwithstanding the protections provided to them by section h.
While the regular income stream from a tenant typically is viewed as a valuable asset to be preserved, that is not always the case, particularly in connection with a below-market lease. In this case, the tenants had objected to the sale free of their leasehold interests; however, they did not specifically request adequate protection of their interests until after the sale had already been approved.
By then, it was too late. If a timely request for adequate protection is made, appropriate forms of protection for a tenant under e arguably might include, among other possibilities, the right to remain in possession of the property for the remainder of the lease term, or, alternatively, suitable compensation for loss of the leased space, such as for the cost of relocating and for any damages arising from the business interruption associated with such disruption.
The Spanish Peaks court held that the tenants lost their rights to adequate protection by not asserting them prior to the sale. Tenants in future cases should take heed and assert their adequate protection rights early and vigorously, by demanding possession, monetary relief and other forms of adequate protection. Andrew L. Turscak, Jr. Turscak ThompsonHine.
Alan R. Lepene Lepene ThompsonHine. Louis F. Solimine Solimine ThompsonHine. This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgement of its source and copyright.
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Lepene, Partner. The court found the letter to be unpersuasive since Illinois law provides that these letters are not binding and may not be relied upon by taxpayers.
The district court opinion provides valuable lessons to be followed at least until it is reversed or not followed in the jurisdiction in which a section sale takes place. First, a purchaser must research the relevant bulk sales statutes of the relevant taxing jurisdiction to determine whether they provide similar exposure to the purchaser as is the case in Illinois.
Two, the purchaser should insist that an amount sufficient to pay the tax liabilities is held in escrow pending a final order as to its disposition. Third, special attention should be given to this issue in a credit bid context. Finally, secured creditors and the committee of unsecured creditors, in valuing alternative transactions, should consider this potential haircut to their recovery.
Send Print Report. Dechert LLP. Published In: Sales. Bankruptcy Code. Bulk Sales Act. Chapter Commercial Bankruptcy.