Regus Affiliates’ Bankruptcy Case May Set Precedent for Coworking Space Landlords

Property Owners Concerned About Possible Unintended Consequences, Attorney Says

COSTAR

By Candace Carlisle CoStar News

COWORKING SPACE
Parisoma, a coworking space, is seen mostly empty in San Francisco, California on March 12, 2020. – Tech-savvy Silicon Valley is joining the trend of remote work and classes as people seek to contain the fast-growing disease, relying on many of the technologies invented or refined in the area. (Photo by Josh Edelson / AFP) (Photo by JOSH EDELSON/AFP via Getty Images)

A U.S. bankruptcy judge is allowing Regus Corp., part of the world’s largest shared office provider International Workplace Group, to pay rent to affiliates’ landlords in a case that may set a precedent affecting owner rights as coworking companies struggle with reduced demand in the pandemic.The court-approved funding from Regus Corp. was granted by Judge Brendan Linehan Shannon in the U.S. Bankruptcy Court for the District of Delaware for 13 Regus affiliates that have filed for Chapter 11 bankruptcy protection. More affiliates are expected to join the case because the pandemic has cut so severely into the bottom line for the coworking affiliates of Regus Corp., which has more than 1,000 locations in the United States and Canada under brands such as Spaces and No. 17.The Regus case could be a preview of what other coworking companies will face, said Mike Ablon, a founding partner of PegasusAblon, a Dallas-based real estate development and investment firm, who has worked with numerous coworking tenants but is not involved with the Regus case.”Any time a lead of a group goes out there, with potential restructuring or re-negotiations, they are watched closely by everybody as an indicator of what might follow,” Ablon said.How the agreement is interpreted by the judge could set a legal precedent affecting hundreds of other Regus affiliates, which could affect or bind a landlord’s rights, said Michael Held, a partner specializing in bankruptcy law and restructuring at law firm Jackson Walker LLP’s Dallas office. He’s following the issue for a client that’s a landlord to a Regus affiliate not included in the bankruptcy case.”These tenants have significant spaces in buildings with a large square footage and typically high-dollar finish outs,” Held said in an interview. “Landlords are worried about the unintended consequences for a tenant’s ability to assume or reject a lease under bankruptcy code.”RGN-Group Holdings LLC, a Regus affiliate based in Carrollton, Texas, is the lead debtor in the case. The bankruptcy judge said the parties in the case needed time to review a stipulation in a payment agreement between one of the affiliates in the case, RGN-Columbus IV LLC, and Regus Management Group LLC. The Columbus entity holds a three-story office lease at 711 N. High St. in Columbus, Ohio, according to court filings.

Little Precedent

The cases represent a subchapter of Chapter 11 bankruptcy with little case law as precedent, said Held with Jackson Walker. The law, called subchapter V, was adopted last year after the Small Business Reorganization Act of 2019 was signed into law to help expedite the bankruptcy process for small businesses with a debt ceiling of less than $2.73 million. However, in March, as part of the Coronavirus Aid, Relief and Economic Security Act, the debt ceiling was expanded up to $7.5 million for subchapter V cases.A representative for Regus Corp. did not immediately respond to questions from CoStar News.Held said there are pros and cons to filing for subchapter V, such as there’s not a watchdog committee of unsecured creditors in these types of Chapter 11 bankruptcy cases. In a traditional Chapter 11 bankruptcy case, landlords are a big part of the unsecured creditors committee. In a subchapter V case, a trustee is automatically assigned to oversee the case.”There’s heavy interest in this case,” Held said. “By this time next week, I wouldn’t be surprised if there was a doubling of landlords involved that don’t necessarily have debtors as tenants but have filed notices of appearances to make sure nothing is being done affecting or binding landlord’s rights.”A meeting of creditors tied to the Regus affiliates’ bankruptcy case is scheduled for Sept. 9, according to court filings.

For the Record

The Regus affiliates that have filed for bankruptcy protection as of Thursday include RGN-Group Holdings LLC; RGN-Columbus IV LLC; RGN-Chapel Hill II LLC; RGN-Chicago XVI LLC; RGN-Fort Lauderdale III LLC; H Work LLC; RGN-Group Holdings LLC; RGN-National Business Centers LLC; RGN-Lehi I LLC; RGN-Lehi II LLC; RGN-Atlanta XXXV LLC; RGN-Arlington VI LLC; RGN-Chevy Chase I LLC; RGN-Philadelphia IX LLC.

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