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Insolvent, Not In the Street
by Ron Davis

Can a shopping center owner use a tenant's bankruptcy as an excuse to evict him?

Not if the tenant continues to pay rent and makes certain that the premises he leases are occupied and conducting a normal business.

At least that is the law in Missouri, where a recent court case ensures the rights of a tenant to preserve the terms of the lease with his shopping center landlord after bankruptcy.

Details of that case show that a supermarket tenant Food Barn leases space at a Kansas Center-area shopping center under a long-term arrangement that allows Food Barn to extend its lease six times for five years each. Before the original term expired, however, Food Barn sublet the premises to another tenant, which, in turn, sub-sublet to a retailer named Hobby Lobby.

Food Barn subsequently declared bankruptcy and sold almost all its properties to pay off its debts. Its sole remaining possession was the shopping center lease at issue in the case.

The shopping center owner sued to regain the leased premises and evict Hobby Lobby, claiming that Food Barn had rejected the master lease by declaring bankruptcy.

In response, Food Barn, backed by its sublessees, claimed that no "substantial" breach of the lease had resulted from the bankruptcy declaration, nor had the shopping center suffered any damage from the incident. In fact, Hobby Lobby was continuing to make regular rental payments and operate a business in keeping with the terms of the lease.

Therefore, Food Barn concluded, the shopping center owner was, by its actions, violating the lease.

In agreeing with Food Barn, a Missouri appellate court, explained, "It is undisputed that Hobby Lobby occupies the Food Barn premises and all rent payments are current. As such, the shopping center owner has received all of the benefits from the lease for which it bargained. Because the shopping center owner has failed to demonstrate that the [Food Barn bankruptcy] was a substantial breach or that it was damaged thereby, it has failed to establish that Food Barn terminated its right to remain in possession of the property."

(Block Properties v. American Nat. Ins., 998 S.W.2d 168 [Mo.App.W.D. 1999])

Decision: September 1999
Published: December 1999



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