WeWork Files for Chapter 11 Bankruptcy
Continuing our law firm’s coverage of high-profile Chapter 11 bankruptcy filings we look at this week’s WeWork bankruptcy news.
Virtually everyone has heard of WeWork. Years ago WeWork was a bastion of free-thinking entrepreneurs. The plan seemed brilliant: enter into billions of dollars of leases in hip urban settings, and rent them out on a flexible basis, offering all the accoutrements of a modern work setting.
Then came the Pandemic, a concomitant shift in work environment preference, and reckless spending by eccentric executives of the company. And now, Chapter 11 bankruptcy.
Rather than focus on the proverbial question of “how did it get this bad?” I wanted to focus in on the fallout from the billions of leases that are broken during a process like this.
I’m not aware of a Chapter 11 bankruptcy in history that involves this many billions of dollars of executory contracts being addressed. Executory contracts are those that are mutually in force at the time of a Chapter 11 filing. For WeWork, these were the billions in leases that were simply not performing.
Following the pandemic, companies began offering work-from-home positions, obviating the need for high-end urban office space.
This unique business idea meant that high-end commerical leases—usually with no shortage of potential tenants in “normal” times—were left sitting on the vine so to speak. This is a potential commercial real estate bomb shell as will be discussed below.
Once WeWork began missing lease payments, the contract entered default. Under the Section 365 of the Bankruptcy Code, these leases can be rejected by WeWork in it’s Chapter 11 schedules.
The Landlord can them move to repossess the property and terminate the lease. Here’s the kicker for the landlords, however: rejected executory contract damages are pre-petition and therefore unsecured debts.
Many of these landlords, therefore, miss many, many months of high-end rent. As a result, this situation surely will reverberate in the commercial real estate market.
As always, nothing in this article shall be construed as legal advice. Neither the words contained herein or their thoughts and perspectives shall form an attorney-client relationship. Bankruptcy cases are complex and if you need legal advice in this area please seek legal counsel forthwith. James Olsen Law gives no legal or business/investing advice by virtue of these articles.
