Managing a Chapter 11 bankruptcy requires that many things go correctly if a company hopes to continue its operations. In most cases, a Chapter 11 filing gives a company time to negotiate with creditors and landlords in an attempt to reach terms that make sense for both parties.
A creditor, for example, may be willing to allow longer payment terms or reach a payment deal on past debts. Landlords, on the other hand, must decide whether they're willing to risk the company going out of business.
Related: Essential retailer closing 400 stores in Chapter 11 bankruptcy
During a Chapter 11 bankruptcy, it's not uncommon for a company — especially a retail or restaurant business with lots of locations — to try to negotiate lower leases and even forgiveness on back rent not paid. The landlord might consider those things because losing the tenant comes with risk.
If a landlord believes it would struggle to find a new tenant and/or does not want the expense of remodeling the property, accommodations are sometimes made. If a landlord does not want to make a deal, a business in Chapter 11 bankruptcy can also take steps to terminate the lease.
Retailers and restaurants often close locations where they don't believe they can make money, even with an accommodating landlord. In other locations, they may try negotiating because they believe they can be profitable if expenses are lowered.
Red Lobster tries to make a deal
Red Lobster formally filed for Chapter 11 bankruptcy on May 19. At the time of the filing, it immediately closed 93 underperforming locations. The chain shared in June that another 100 locations could close if it could not reach a deal with its landlords.
The company, in a June court filing, showed that 228 total restaurants cannot make money with their current lease situations. With the 93 Red Lobsters already closed, that suggests that the company could close an additional 135 restaurants.
Locations at risk included the company's flagship Times Square New York location. In that case, its landlord actually wants a significant rent increase for the property.
The restaurant chain now faces opposition to its bankruptcy plan from some creditors and landlords, threatening the overall process.
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Red Lobster has a landlord problem
Red Lobster, which filed for bankruptcy in the Middle District of Florida, had hoped to find a buyer for the chain. The deadline for those bids is July 22 and a group of creditors and landlords have filed an objection to the struggling seafood chain's plan with the court.
"Some of Red Lobster’s landlords and other creditors have objected to the proposed settlements for outstanding debt as the struggling casual-dining restaurant chain seeks a buyer, according to recent court filings in the company’s bankruptcy case," Nation's Restaurant News reported.
Related: Another popular beverage brand files Chapter 11 bankruptcy
Red Lobster is seeking to be acquired by Fortress Credit Corp., its largest creditor, unless a better bid comes in.
"Once that sale is complete, the debt obligations would be transferred to the new owner, hence the flurry of recent objections as creditors seek to have their debts repaid," NRN added.
More bankruptcy:
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- Distressed home improvement retailer plans Chapter 11 bankruptcy
A number of landlords object to the plan saying that are owed over $47,000 with a proposed repayment of $0.
ACI Systems, a payment company, claimed to be owed over $105,000, a number that's rising given that it's still providing services to Red Lobster, and has demanded payment in full. Multiple other creditors owed more than $100,000 by Red Lobster have been offered $0 in repayment and no guarantee of future performance, which they say is contractually required.
