Saturday, August 15, 2009


As if commercial landlords weren’t suffering enough, bank takeovers by the FDIC leave additional misery in their wake. Most commercial landlords are familiar with the fact that the federal statute known as FDIA, or Federal Deposit Insurance Act, the legislation governing bank insolvencies. This act essentially is a regulatory bankruptcy code, but acts somewhat differently than the Bankruptcy Code, to permit the FDIC to reject unexpired leases. The way the FDIA works is that a landlord hears from the FDIC by letter, which announces (i) its standing as the receiver for the bank, and (ii) its intention to repudiate leases to which the failed bank is a party. FIRREA, the Financial Institutions Reform, Recovery and Enforcement Act, amended the FDIA to expressly give the power to repudiate contracts, including leases. The FDIA does not, like the bankruptcy code, establish a fixed time period within which a lease must be repudiated; it must be within a “reasonable period.”

So what does a commercial landlord get for compensation under the FDIA? A lessor gets “unpaid rent” up to the date of the appointment of the receiver, and “contractual rent” accrued from the date of that appointment through the date of the FDIC’s repudiation of the lease. Nothing else?- the landlord laments. Well, perhaps there is a bit more relief, depending on the scrutiny of the court reviewing the claims of a commercial landlord. Some courts have defined “unpaid rent” to include rent payments and other obligations, such as those of the tenant institution to keep the premises in good condition and repair. (By contrast, “contractual rent” is nothing more than the sum of money reserved as recurring, periodic rent set out in the lease.)

Take a look at the following extract of an opinion from the Third U.S. Circuit Appeals Court:
“Section 1821(e)(4)(B) states:
Notwithstanding subparagraph (A), the lessor under a lease to which such subparagraph applies shall-
(i) be entitled to the contractual rent accruing before the later of the date-
(I) the notice of disaffirmance or repudiation is mailed; or
(II) the disaffirmance or repudiation becomes effective,
. . . .
(iii) have a claim for any unpaid rent, subject to all appropriate offsets and defenses, due as of the date of the appointment which shall be paid in accordance with this subsection and subsection (i) of this section.

1821(e)(4)(B) provides that a claimant has the right to "unpaid rent" due at the date of appointment of the receiver, and "contractual rent" accruing before the latter of the date that the notice of disaffirmance or repudiation is mailed or the date it becomes effective.

"Rent," paid or unpaid, clearly encompasses contractual rent. Yet "contractual rent" must include a different category of claims than "rent" generally. If it did not, there would have been no reason for Congress to distinguish between "unpaid" and "contractual" rent in section 1821(e)(4)(B) or, at least, Congress would have required the FDIC to pay "unpaid contractual rent" rather then "unpaid rent" due as of the date of the appointment of the receiver. 1821(e)(4)(B) distinguishes between claims that accrue by the date of the receivership and claims that accrue between the date of receivership and the disaffirmance of the lease.

Black's Law Dictionary defines rent as "consideration paid for use or occupation of property." Meritor's [taken over in receivership by the FDIC] obligation to maintain the premises in good repair was an element of the consideration it paid for use of the property. Presumably, in lieu of a higher quarterly rent payment, the sublease obligated it to: maintain all parts of the Premises in good repair and condition except for ordinary wear and tear and . . .[to] take all action and . . . make all structural and non-structural, foreseen and unforeseen and ordinary and extraordinary changes and repairs which may be required to keep all parts of the Premises in good repair and condition . . . .

Meritor had an obligation to keep the premises in good condition and repair, and an obligation to ensure that the premises were maintained lawfully, even if satisfaction of these duties required it to make substantial renovations to the property. We find that these obligations constitute "unpaid rent" for the purposes of 12 U.S.C. § 1821(e)(4)(B)'s specification of the receiver's liability.

We construe "contractual rent" more narrowly than "unpaid rent," however, to effect the purpose of the statute in giving the receiver an opportunity to survey the thrift's situation without being immediately required to decide whether to assume large obligations.

While "contractual rent" refers only to those sums that are fixed, regular, periodic charges, the costs of structural repairs to the facade were not fixed, regular, and periodic. Consequently, the FDIC is not subject to any liability for the cost of repairs that accrued after the institution of the receivership because those costs were not contractual rent. The district court, however, found that "Meritor was required under its lease with First Bank to install flashing under the windows and insert vertical joints in the facade to allow for brick movement at a cost of $980,000. This finding seemingly would make the FDIC liable for the structural repairs to the north facade under its obligation for unpaid rent.

The district court, however, made this finding in determining the contractual rent due to First Bank rather than determining the unpaid rent due. As a result, it made its calculations as of the date the FDIC disaffirmed the lease, March 31, 1993, rather than the date Meritor went into receivership, December 11, 1992. Consequently, we must remand for the district court to find what amount, if any, of "unpaid rent" obligations had accrued by the date of the receivership, December 11, 1992.

In addition, we note that the FDIC argues that renovations less extensive than the full $980,000 reconstruction of the facade would have satisfied Meritor's obligations under the sublease. Since the district court's finding that the full reconstruction was required by the sublease was made in the context of denying the claim altogether, the court should consider whether lesser expenditures would have fulfilled Meritor's obligations. We will require this reconsideration because the district court did not address this possibility in its opinion.”

The message to commercial landlords here is to get counsel, and have that person, with you and your broker, read the financial institution’s lease with a gimlet eye. There may be additional sums recoverable as “unpaid rent,” if the obligations of the lessee accrued prior to the date the FDIC was appointed as the receiver. If the sum in controversy is sufficiently great, it may be worth taking the feds to the mat to try recovering it.


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