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April 23, 2014

One Potato, Two Potato, Three Potato…Well Actually It’s All One Potato. Re: Amending Lease Agreements

The Delaware Bankruptcy Court recently held that a third amendment to a lease agreement entered into for the purpose of leasing a second building could not be severed from the original lease agreement; and the debtor was not allowed to reject the lease on that second building under section 365 of the Bankruptcy Code. In In re Contract Research Solutions, Inc., (the decision can be found here) the debtor, Allied Research International, Inc., had originally leased one building from a third party, Golden Glades Associates, LLP. Allied and Golden amended the lease agreement twice, each time relating to the first building. A few years later, the lease agreement was amended a third time for purposes of leasing a second building located in the same building complex. The third amendment contained terms that applied to the first building, expanded the definition of premises to include both buildings, and provided that the terms of the original lease remained in full force and effect, except where modified by the third amendment. Allied commenced bankruptcy proceedings on March 26, 2012 and eventually ceased use of the second building, vacated it, and sent the keys to Golden. Golden quickly sent the keys back to Allied. As if the keys were a hot potato, Allied sent them back to Golden and filed a motion to sever and reject the third amendment arguing that the amendment was an independent agreement that could be severed from the original lease because it involved a different building.

Applying Florida state law, which governed the original lease and amendments, the bankruptcy court concluded that the third amendment contained language demonstrating a direct connection between the original lease and the third amendment that evidenced the integrated nature of the documents. Noting that Allied had leased a third building from Golden in the same complex as the other two buildings, but that this third building was leased under a separate lease agreement, the court found that when the parties intended their lease arrangements to be separate, they knew how to do so. Allied got stuck holding the (whole) hot potato.

Cooking lesson for future debtors and creditors: in order to not get stuck with the whole hot potato, take care when drafting and don’t opt for the quick recipe shortcut; be choosey about your ingredients; and consider what could happen in the event of a possible rejection or assumption of your bundled contract ingredients. In this particular case, it would have been simple to draft a separate lease agreement for the new building, dice the potato accordingly and not get burned.

© 2014 Bracewell & Giuliani LLP

About the Author

Associate

Ilia O'Hearn is a member of the firm's Financial Restructuring team. Her practice focuses on representation of institutional investors in complex workouts and insolvency proceedings in US and international restructurings. Before becoming an attorney, Ilia spent her career in public accounting. She is registered as a Certified Public Accountant in the State of Connecticut.  In the early part of her public accounting career, Ilia worked on audits of companies in the manufacturing, retailing and distribution industry, as well as in the banking, health...

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