Dealing with Going out of Business Signs

Landlords, tenants spar over going-out-of-business signageA retailer’s “going out of business” sign can become a banner of failure for an otherwise healthy shopping center, lament landlords and property managers that are struggling to prevent the plastering of such notices over shop windows. Despite lease language prohibiting such sales, bankruptcy courts tend to side with liquidating tenants, landlords say. “Any real estate owner that owns lots of assets is going to run into these liquidations,” said Christopher Weilminster, senior vice president of leasing at Rockville, Md.–based Federal Realty Investment Trust. “It’s pretty ugly, and it’s not anything you want to see, but as a large landlord, it’s inevitable that these will become a part of your business. We have 300 tenants in our portfolio, and at one time or another, something’s going to happen.”But this does not mean that center owners must shrink from defending their contractual rights in the struggle to maintain a property’s image, sources say. The landlords of some of the 520 stores Movie Gallery closed after filing for Chapter 11 last year asked a bankruptcy judge to rein in the retailer’s store-closing tactics. The 16 landlords, including Inland Real Estate Group of Cos. and Wal-Mart, said the court’s liquidation guidelines were “broad, unilateral and egregious” and allowed Movie Gallery to operate open-ended sales that would harm the integrity of the shopping centers. The plaintiffs asked that Movie Gallery be kept from using the word “bankruptcy” or neon or Day-Glo colors on any signage. They also requested limits on sale hours. Movie Gallery agreed to restrict its closing sales to the centers’ regular operating hours, to complete the sales events within 60 days and to restrict “the extent and content” of the signs. Even as U.S. courts approve going-out-of-business sales, they are demonstrating some regard for the shopping centers’ operating environments. They are forbidding the stores to spill out from their spaces into the common areas and to conduct on-site auctions and the like. The courts are also restricting the sale hours and the positioning of on-premises promotional sign holders. Though most landlords draft explicit language prohibiting going-out-of business sales in the “Use” or “Operation by Tenant” sections of the leases, bankruptcy courts still favor maximizing creditor distributions and tend not to hold the tenant to some of the stricter lease provisions, says Andy Graiser, co-president of DJM Realty, a Melville, N.Y.–based disposition firm.This can start a legal tussle. “In certain situations, if communication between the parties breaks down, landlords will get more aggressive,” Graiser said. “But landlords generally understand what needs to get done in these sales, and that is to make sure that all of the inventory gets sold to satisfy creditors.” And often, he says, among those creditors are the shopping centers themselves. Many states require a permit for going-out-of-business sales, in part to keep merchants from falsely promoting liquidation sales and profiting at the expense of same-center competitors and unwary shoppers. Sometimes the merchant does not close down at all, but instead merely changes the store’s ownership or name. “These laws are largely created to protect the consumer,” Graiser said. Following a rash of retail bankruptcies among predominantly enclosed-mall tenants in the early 1990s, prominent retail landlords have made doubly sure that all their standard leases place restrictions on going-out-of-business sales, says John Kokinchak, senior vice president of property management at Developers Diversified Realty Corp. “But, ironically, the lease language exists to prevent the type of signage we see the court overriding,” he said. “With some exceptions, courts still allow stores to hang big banners that completely block views into the store.”