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*Much of this article appears in Chapter 157 in Norton Bankruptcy Law and Practice 2d
published by the West Group and appears with their permission.
on the enforceability of cross-default provisions offers little thoughtful analysis and is inconsistent. One line of cases requires a finding that the cross-defaulted obligations constitute a single agreement as a condition to enforcement. The courts in these cases have recited the following factors as relevant to the analysis: (i) whether the leases which are subject to cross-default provisions are co-terminus; (ii) whether rent provisions establish the same rent for each lease, one rental payment for all leases, or appropriate different rentals for each building; (iii) whether notice of termination of one lease constitutes termination of all leases; (iv) whether leases could be assigned or sublet to a party that does not propose to take an assignment or sublease of all properties; and (v) whether separate consideration supports each lease agreement.
To succeed in enforcing its cross-default provisions under this analysis, a lessor of multiple health care facilities to a single lessee must demonstrate that it's master lease agreement constitutes a single agreement even though it may have entered into a number of different leases, each incorporating the terms of the master lease, with different (though affiliated) tenants for different terms at different rents. Obviously, there is room for different applications of the stated factors on these facts. The Ventas, Inc. Master Lease appears to simplify the "single contract" analysis by having the Master Lease executed by the lessor and the parent company of the operating subsidiaries, as guarantor, and an intermediate holding company, as tenant. The Master Lease then contemplates assignment or sublease to the operating subsidiaries. Thus, the Master Lease purports to be a single lease of several locations.
Other courts have refused to enforce cross-default provisions on the rationale explained in the Sambo's Restaurants case. One lessor leased ten restaurant locations to Sambo's. Before filing bankruptcy, Sambo's closed two locations. When the debtor sought to assume and assign one of the remaining leases in its bankruptcy, the lessor objected. The lessor argued that because the leases had cross-default provisions, the debtor could not assume the lease unless it assumed all the leases and cured all defaults. The bankruptcy court rejected the lessor's view on three grounds. First, the court found that section 365(f) proscribed limitations on the debtor's ability to assume and assign an unexpired lease other than those found in section 365(c). Second, the court concluded that cross-default provisions are financial condition clauses rendered ineffective by section 365(c)(1)(A). Finally, the court held that enforcing the cross-default provisions would circumvent the limits on lease damages established by section 502(b)(7).
The Sambo's analysis undoubtedly facilitates a debtor's reorganization possibilities, but it totally disregards the bargain negotiated by the parties. The court never considers whether consideration supports the cross-default provisions. In the typical sale/leaseback or lease of a health care facility, the lessor assumes a substantial risk when it purchases a single use facility at a price in excess of the replacement cost. The health care provider/seller/tenant rids itself of the risks of owning a single use facility, raises capital to use for expansion, and ends up with off balance sheet "financing" of its real estate. To balance the shift in risk to the lessor, the parties agree that the seller/ tenant will provide additional protections to the lessor in the form of guaranties and cross-default provisions.
Neither sections 365(e) or 365(f) dictate the Sambo's result. Section 365(f) addresses only the requirements for assignment of an executory contract or unexpired lease. A lease may not be assigned unless (a) it has been assumed, and (b) the assignee demonstrates its ability to perform. Section 365(f)(3) states only that a provision in a contract that terminates or modifies the contract upon assignment is unenforceable. The cross-default provisions are relevant to section 365(f) only because section 365(f) requires assumption of a contract as a condition to assignment. Section 365(b)(1) requires a debtor to cure or provide adequate assurance that it will cure defaults under a contract before the debtor can assume the contract. From the lessor's perspective, this is the relevant section for determining the enforceability of a cross-default provision. Section 365(f) only comes into play if the requirements of section 365(b) can be met.
Section 365(b)(2) identifies certain types of defaults to which the cure requirement of section 365(b)(1)
