Meanwhile, Section 365 also contains provisions added to the law at the urging of shopping center lobbyists. The definition of "shopping center," as used in the Bankruptcy Code, is often a litigated issue, but is often defined as a group of independently owned stores contractually interrelated as to the use of store premises contiguous to common area. Landlords of shopping centers, as well as tenants, often are concerned with a balance of tenants. This is accomplished through a pattern of legal interrelationships, most often, by including terms in a lease restricting permitted uses structured with proximity and distance provisions. For example, a grocer's lease may make it the exclusive retailer of food and/or groceries. In addition, should that grocer's store include a pharmacy, it may negotiate that it be the only pharmacy in the shopping center with 500 feet of the grocery store.

The shopping center provisions of section 365 seek to uphold those bargained-for rights. Specifically, section 365(b)(3) restricts a debtor-tenant's ability to sell, or "assign," its rights in a lease when the assignment would adversely affect the "tenant mix or balance" of the shopping center. The purpose is to prevent the debtor-tenant's bankruptcy from negatively impacting other tenants.

In light of these conflicting rights, the issue becomes how a court can balance the interests of a landlord and existing tenants against the interests of the debtor-tenant's estate and creditors. Knowing how a court will measure particular circumstances and render a decision is paramount.

Consider a hypothetical: A debtor-tenant operates a large toy store in a shopping center. It wishes to assign its rights under its unexpired lease to a third party that intends to operate a retail furniture store in half the premises and lease the remaining portion to other tenants. The lease does not have any use or assignment restrictions, but the landlord argues the assignment would disrupt the shopping center's tenant mix because another tenant, a discount retail store, sells some furniture. The question becomes, does the Bankruptcy Code prevent the assignment even where there is no restrictive provision in the lease?

Consider a second hypothetical: A debtor-tenant operates an auto-parts store in a shopping center. In bankruptcy, it wishes to sell the lease to a retail clothing store. But the debtor-tenant's lease contains a provision that restricts to selling auto parts. The landlord argues that the proposed assignment breaches the lease and violates section 365(b)(3) of the Bankruptcy Code. The debtor-tenant counter-argues that it is unable to comply with the restriction because of the saturated retail auto-parts market in the area, rendering the restriction, in effect, an absolute prohibition on assignment and therefore unenforceable under the Bankruptcy Code. Does the Bankruptcy Code allow the assignment over the lease restriction because the tenant-debtor has not been able to find a replacement auto-parts retailer?

In both hypotheticals the court is faced with the decision to preserve the interests of the debtor-tenant or the landlord and remaining tenants.

In hypothetical 1, a court would likely harm the existing tenant if it allowed the assignment by permitting a business that competes with or otherwise disrupts the sales of the existing tenant. But if the court denies the assignment, it would effectively add an anti-assignment and/or use-restriction term to a lease. In hypothetical 2, if the court rules in favor of the landlord, it would enforce the provisions of the lease, perhaps unjustifiably, to the detriment of the debtor-tenant and its creditors. Alternatively, if the court rules in favor of the debtor-tenant, permitting the assignment, it will effectively circumvent the use restriction and deny the landlord bargained-for rights.

Both hypotheticals are based on actual cases and published bankruptcy court opinions. In both cases, the court sought to preserve the bargained-for rights of the parties as part of the lease. In hypothetical 1, the court noted that section 365(b)(3)(D) should be interpreted to uphold contractual rights under the lease, if possible. Therefore, the court ruled that the assignment was valid because the lease did not contain any use restriction and a particular tenant mix was never bargained for. In hypothetical 2, the court said the competitive market did not render the restriction limiting the use to a retail auto-parts store an absolute anti-assignment provision (which would be unenforceable under the Bankruptcy Code). Further, the court found that if it had permitted the assignment in contrast to the use restriction, it would have effectively rewritten the lease in violation of section 365(d)(3).

In light of the conflicting interests affected by section 365(b)(3), fact-intensive analyses done by the courts, and likely deference to the existing lease provisions, it is clear that both landlords and retailer tenants alike must be cautious when negotiating a shopping center lease and take notice of and employ the guidance from past decisions. A prospective retail tenant considering a shopping center lease must become educated regarding use restrictions in the other shopping center tenant leases. A tenant must be mindful of these provisions when it negotiates its own lease and when it seeks to prevent another tenant's sale of its lease in bankruptcy. The retailer tenant should clearly define the minimum distance required between it and another retailer selling competing products. It may also wish to define the percentage of sales that "ancillary" products can make up of a competing retailer's sales volume.

Bigger picture? Landlords and tenants within shopping centers have a lot to know – and a lot to keep in mind both when negotiating leases and dealing with them in bankruptcy proceedings.