October 1, 2001 -- The Exodus bankruptcy filing is the latest in a series of failures that have left carrier hotel and data center landlords well versed in the bankruptcy code and debtors' lease options in Chapter 11 cases.
Companies filing for bankruptcy have the option of rejecting real estate leases and many other types of agreements - such as fiber optic contracts, colocation agreements and hosting agreements - as part of their reorganization, according to Jeff Moerdler, an attorney with Mintz, Levin who specializes in telecom real estate.
The debtor has 60 days to decide to reject a lease, but Moerdler said that in complex cases such as Exodus that deadline can be extended indefinitely as the company reorganizes.
"The (leases) that have no value will be terminated quickly," said Moerdler, because of the debtor's obligation to make rent payments, which have priority while a debtor is in Chapter 11.
"From the date of the filing, the landlord is pretty safe," said Moerdler, assuming that the debtor has cash or generates revenue. "With pre-petitition rent, the landlord becomes an unsecured creditor and must stand in line with everyone else."
Moerdler said that when a lease is rejected, landlords can usually recover some money from security deposits, which are common in telecom leases. Landlord recovery from a deposit is usually capped by the court at either one year's rent or 15 percent of total value of the lease, depending on the specifics of the lease.
Because data centers are often built-out and leased in stages, many providers who file Chapter 11 wind up negotiating with landlords about the fate of excess space, hoping to retain the square footage that is finished while returning the remainder to the landlord.
The other major facilities issue in a bankruptcy is the fate of leases that can be sold to raise cash. The debtor can negotiate an assignment or sale with another party through a "stalking horse contract," Moerdler said. The assignment and subletting restrictions and the use clause limitations contained in a lease will generally be overriden by the bankruptcy court to facilitate such transactions.
Any transaction must be approved by the bankruptcy court, which will often call for an auction seeking higher bids (which would raise more cash to pay off creditors).