Retailers and landlords were at odds last week testifying in Congress over proposed legislation that would change bankruptcy rules to allow retailers more time to accept or reject leases while in bankruptcy protection. The National Retail Federation (NRF) asked Congress to overturn a 2005 law that gives retail tenants up to 210 days after they file for bankruptcy protection to accept or reject leases. Meanwhile, ICSC and landlords are pushing to keep rules in their current form.

The debate unfolded at Congress on March 11, as six witnesses, including a landlords’ representative, several bankruptcy lawyers and a George Mason University professor of law, testified before the U.S. House of Representatives’ Judiciary Subcommittee on Commercial and Administrative Law. Daniel Hurwitz, president and CEO of Beachwood, Ohio-based shopping center REIT Developers Diversified Realty, testified against extending the 210-day window. The testimony was part of a hearing on the fate of electronics retailer Circuit City, which is undergoing liquidation after an unsuccessful attempt at Chapter 11 reorganization late last year.

Hurwitz, who represented both Developers Diversified, Circuit City’s largest landlord, and the ICSC at the hearing, claimed the factors forcing retailers into liquidation today stem from the drop in consumer spending and the ongoing credit crunch rather than the length of time such firms have to make real estate decisions. He noted that his firm offered to extend the amount of time Circuit City had to accept or reject its leases beyond the official 210-day period, but the retailer ultimately had too little liquidity to emerge from Chapter 11.

“It is clear that what is pushing retailers into liquidation relates to credit availability and vendor willingness to ship consumer products on reasonable terms," Hurwitz told the committee. "Nothing in the bankruptcy law can change this unfortunate reality.”

The NRF, which sent a letter to the committee on the afternoon of the hearing, meanwhile, claims the 210-day window does not allow retailers a sufficient amount of time to develop a viable reorganization plan. Furthermore, depending on when the 210-day window falls, it could force some chains to make decisions without being able to get through crucial seasonal sales periods that could help them determine whether the company is viable. For example, retailers filing for Chapter 11 protection in the first quarter of the year would not be able to get through the holiday shopping season before deciding. That, in turn, could increase the likelihood of the company opting for liquidation. The NRF proposes that the law be changed to its pre-2005 state, when retailers had an initial period of 60 days to make a decision and then could ask the court for an indefinite number of extensions after the deadline ran out. Alternately, the deadline should be extended to a year, the NRF argues.

“We pointed out it was a mistake to change this,” when the new law was enacted in 2005, says Mallory Duncan, general counsel with the NRF. “The current market environment demonstrates the wisdom of what our members were saying back then.”

The current climate does make it hard for landlords to re-lease vacated spaces, notes Gary A. Glick, partner with Cox Castle Nicholson LLP, a Los Angeles-based real estate law firm. But the ICSC spent 15 years lobbying for the 2005 legislation and in the long term, the law makes more sense in its current form because it forces landlords and tenants to work out solutions that are in the best interest of both, he says. Pre-2005, bankrupt retailers would often hold on to dark spaces so they could sell the leases to third parties and cash in on their real estate.

While property owners and managers say they are willing to work with retailers on a case-by-case basis to help them reorganize, they don’t want to be forced to sit on the sidelines as tenants take years to close an unprofitable store. Jones Lang LaSalle Retail, for example, is currently helping regional supermarket chain Bruno’s and apparel retailer S&K Menswear, both of which have filed for Chapter 11 recently, restructure some leases and exit unprofitable locations.

But a tenant that needs more than seven months to examine its store fleet is clearly in too much trouble to survive long term, argues John Bemis, director of leasing and development with Jones Lang LaSalle. The Atlanta-based firm manages more than 55 million square feet of space in the United States.

“If you are unable to determine what stores are profitable or can become profitable within that timeframe, then you have substantially larger problems with your company,” says Bemis. “They are basically asking to tie up options on real estate and that’s unacceptable to landlords.”

This might have been true in the past, when retailers had a sufficient amount of time to take stock of their real estate portfolios before filing for bankruptcy protection, counters Patrick C. Maxcy, partner in the bankruptcy and restructuring group of Sonnenschein Nath & Rothenthal LLP, an international law firm. But in today’s environment, when tenants could be unexpectedly pushed over the edge by one bad holiday season, the 2005 law might work against landlords. With scarce financing available for reorganization, retailers are at the mercy of their lenders, who could request that they get an extension for every lease in their portfolio before agreeing to grant a loan, Maxcy says. And if the retailer fails to get that loan and has to liquidate, the landlord might be stuck with an empty storefront that’s very difficult to re-lease.

However, even those sympathetic to the retailers’ cause say that there is no reason it should take them a year to decide what to do with their leases. At most, given the current market environment, they should get another two months, says Craig Johnson, president of Customer Growth Partners, LLC, a New Canaan, Conn.-based consulting firm. In that case, a retailer that depends on a particular seasonal sales period—for example, winter holidays—to do the bulk of its sales might get the boost it needs to survive.

“Today’s financing environment is creating a pretty significant challenge, so some modest flexibility may be appropriate,” he says. “But stretching it out continuously up to a full year does not make sense.”