In a bankruptcy sale of a lease, a profit-sharing agreement in favor of the landlord is an unenforceable anti-assignment clause, according to the Third Circuit.
The July 17 opinion is nonprecedential, however.
The chapter 11 debtor was selling almost 200 grocery store leases. One contained a profit-sharing agreement calling for the tenant to give the landlord 50% of any “net profit” if the lease were assigned.
The landlord submitted a limited objection to the sale, seeking half of the sale price the debtor would receive from the sale. Affirmed by District Judge Gregory M. Sleet, Bankruptcy Judge Kevin Gross of Delaware ruled that the profit-sharing clause was an anti-assignment provision that is unenforceable under Section 365(f)(1).
In the appeals court, the landlord argued that profit sharing was bargained-for consideration promised by the debtor in return for an extension of the term of the lease and the elimination of use restrictions. Nonetheless, Circuit Judge Robert E. Cowen affirmed and upheld the lower courts in a July 17 opinion.
Judge Cowen said that the landlord was unable to cite any cases upholding a similar profit-sharing agreement in a lease. He also said there was no authority for the notion that the landlord had a property interest in the sale proceeds.
“The plain language of Section 365(f)(1) encompasses more than merely provisions that actually prohibit the assignment of an executory contract or unexpired lease,” Judge Cowen said.
Judge Cowen cited Bankruptcy Judge Gross for “aptly” explaining that “a number of courts” have ruled that similar if not identical clauses are unenforceable as prohibitions on assignment.