When Payless ShoeSource emerged from bankruptcy after just four months last year, it seemed like a miraculously short period of time.
In reality, though, the quick turnaround was a matter of necessity: U.S. bankruptcy code requires that a business that files for Chapter 11 protection work out a deal that addresses its real estate leases within seven months or else let its landlords walk away.
On Monday, when Sears declared bankruptcy, its own countdown clock started. As part of its restructuring plan, the retailer said it would close 142 unprofitable stores, adding to the 46 locations already slated to be shuttered by November. This will put a dent in its dwindling store count but will still leave the company with hundreds of leases on its hands and little time (or leverage) for negotiation before the May 15 deadline arrives.
The seven-month timeframe is the result of 2005 reforms to U.S. bankruptcy law that were designed to protect landlords from overly drawn-out negotiations with insolvent tenants that would eventually vacate the space. But, as Reuters reported, the new rules had consequences: More and more retailers liquidated stores and were sold off for parts, unable to execute a successful turnaround on such a tight deadline.
Whether this ends up being the case for Sears remains to be seen: As of Aug. 4, the department store chain operated 360 Kmart stores and 506 Sears stores, according to a public filing, most of which it leases. In many cases, its landlord is a real estate investment trust called Seritage Growth Partners that was spun off from Sears itself in 2015. As part of the $2.72 billion sale leaseback deal, Seritage bought 225 Sears Holdings properties and 24 joint-venture interests, though many have since been liquidated and redeveloped to make room for more profitable tenants.
There’s also the matter of finances: On Monday, a bankruptcy judge approved a $300 million loan from investors to keep stores open and employees paid through the holidays, but Sears will need more where that came from if it’s going to salvage its remaining assets.