Negotiations Between WeWork and Its Landlords Get Tense

When flex space company WeWork filed for bankruptcy, it filed that it had struck an agreement with 92% of its creditors that hold its secured debt.

But there is a lot of big money in unsecured debt owed to landlords. Many of them are trying to push back against the large advantages WeWork has through the bankruptcy laws.

In the WeWork bankruptcy filing, there were at least 475 legal entities listed that were owned by WeWork, the vast majority of which are for tenant relationships to landlords. Among the 30 largest unsecured creditors are those claiming unpaid rent, lease termination fees, and related litigation totaling more than $95,993,378.

A lot of money that landlords want to recover but might not. The threat of bankruptcy leaves property owners with a set of tough options, according to experts who have spoken with GlobeSt.com.

The mention of bankruptcy “is one of the primary debtor tenant negotiating tactics,” John Sparacino, a principal with McKool Smith’s Bankruptcy Litigation practice area, told GlobeSt.com. “You’re going to get really screwed if I file bankruptcy. Do you want to work out something a little better for you or do you want to wait for bankruptcy? And landlords, unless someone puts down a big security deposit or there’s a significant personal guarantee behind the lease, are really exposed.”

“Bankruptcy affords the ability to cancel leases and cap the rejection damages the landlords can get,” Sparacino continued. “If there are many years left on a lease, the debtor can reject the lease “and damages are basically capped at one-year’s rent.”

As Bloomberg recently reported, some of those landlords have been filing objections with the bankruptcy court in New Jersey, arguing against WeWork’s abilities to reject leases. One company, Kato International, had claimed in a filing that “WeWork (represented by one of the largest law firms in the world) appears to be trying to play a game of “Gotcha” with unsuspecting mom and pop landlords in order to force them into what are effectively new leases that WeWork would otherwise be unable to obtain in any legal or consensual manner.” Kato, which owns 12 East 49th Street in Manhattan, the location of WeWork’s headquarters, argued that under current definitions, WeWork could reject the lease on its headquarters and yet retain possession, preventing Kato from finding another tenant.

However, a PR firm representing WeWork contacted GlobeSt.com on Tuesday, November 28, pointing to a court filings from Sunday in which Kato withdrew its objections. Such filings are typically a sign that the parties have come to some agreement satisfactory to both.

“WeWork is walking a fine line because it has to aggressively cut rent costs in order to reorganize successfully, but at the same time its future depends on maintaining healthy relationships with some of those same landlords if it hopes to strike new agreements with them after emerging from bankruptcy, ” Evan DuFaux, a special situations analyst at the research firm CreditSights, told Bloomberg.