The United States Bankruptcy Code, pursuant to 11 U.S.C. Section 502(b)(6), caps a landlord's claim in bankruptcy for damages resulting from the termination of a real property lease. See In re PPI EnterprisesU.S., 324 F.3d 197, 207 (3rd Cir. 2003). Under Section 502(b)(6), a landlord-creditor is entitled to rent reserve from the greater of one lease year or 15 percent, not to exceed three years, of the remaining lease term.

The property industry has seen a dramatic decline in capital values over the last two years with peak to trough falls of approximately 44 per cent compared to a peak to trough decline of approximately 27 per cent during the recession of the early 1990s. This, together with the effect of the challenging economic climate, has led to a number of high profile insolvencies of property owners, developers and occupiers. Given the uncertain economic outlook, it is likely that these trends will continue.

Introduction  

Current turbulent times and the onset of recession are likely to result in an increase in the number of distressed sales and ultimately insolvencies. For those who are fortunate to be in the market as buyers, there may be considerable opportunities but equally there are significant traps for the unwary. This briefing examines some of the key issues which should be considered by prospective buyers of businesses in financial difficulties which are not in formal insolvency proceedings.