If you are in business today, it is inevitable – you will have to deal with people who can’t or won’t pay all they owe.  Remember that prevention is more cost-effective than remediation.

What Can Landlords Do?

Take Care With New Tenants 
Review financial statements and business plans.  Research past performance and credit.  Require a sufficient security deposit, possibly a letter of credit (which may offer advantages over a cash deposit), and structure your rights for maximum access to the funds.  Structure enforceable guarantees.

Work With Troubled Tenants 
Lease modifications may be appropriate.  Structure concessions so that they can be recaptured if the tenant files bankruptcy down the road.  Enhance or enforce guarantees.

Make the Most of Bankruptcy 
Landlords, like vendors, must monitor the case from the inception to prevent overreaching postpetition loan or asset sale terms.  You also have special rights that can be protected in bankruptcy, most notably rights to require payment for postpetition rents, timely assumption or rejection of leases and related protections, and to require that proposed assignees meet certain standards.  Additionally, you need to understand the legal standards for calculating claims if your lease is rejected, and to understand and be prepared to defend any preference attacks (e.g., debtor claims to recover delinquent rent payments received within 90 days of bankruptcy).  During bankruptcy you also may want to enforce guarantees and realize on security deposits/letters of credit.

What Can Vendors Do?

Assess Risk and Performance 
Obtain and review customers’ current financial statements.  Monitor accounts receivable agings, values of guarantees, values of borrowing bases.  Review credit documents and evaluate covenant compliance and enforcement.  Review credit limit amounts and history of enforcement.  Review employee incentives to enhance collections.

Act Now to Mitigate Payment Risk and Improve Performance 
Establish and enforce consistent credit and collection programs.  Base sales staff compensation on actual receipts, not just orders.  Require security agreements and take steps to assure adequate granting, attachment and perfection of liens, including purchase money security interests.  Purchase credit insurance.  Obtain guaranties, possibly secured, to enhance payment and performance prospects.  Enter into letter of credit, COD, or prepayment arrangements.  Educate employees about the importance of complying with established procedures.

Acknowledge and Minimize Bankruptcy Risks 
Changes in credit lines and payment schedules, late payments, and even routine collection practices may leave a creditor open to claims that payments it received within 90 days of a customer’s bankruptcy filing were preferential and must be returned.  Improved credit and collection practices can be structured to minimize the amounts that will be vulnerable to preference attack.  Done wrong, the exposure can be materially increased.

Make the Most of Bankruptcy 
Get involved at the start of the customer’s case.  Monitor the early events in the case – they can be costly if creditors do not protest overreaching by debtors and selected creditors (and their counsel).  Continue selling to the customer in bankruptcy, but only if you get the right court orders and protections in place.  Know your possible exposure for preferences and be prepared to defend any claims that are made.  File claims timely, understand and express your views about proposed asset sales or plans of reorganization.  Sell or buy claims of other creditors, or assets that the debtor is selling.