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'Use Clauses' and the Bankruptcy Code: A Cautionary Tale
The recent Chapter 11 bankruptcy of Trak Auto Corporation (“Trak Auto”), the retail auto parts chain, has yielded a reported decision of the U.S. Fourth Circuit Court of Appeals that offers some insights for landlords on how “use clauses” in leases will be put under the bankruptcy microscope. In re Trak Auto Corporation, 42 B.R. 255 (4th Cir. 2004).
Trak Auto filed its Chapter 11 petition on July 5, 2001 and had once operated 196 retail auto parts stores. Trak Auto sought to assume and assign certain of its leases, including one known as the West Town Lease in Chicago. The West Town Lease contained explicit use restrictions. Section 1.1(L) of the lease limited the use to “the sale at retail of automobile parts and accessories and such other items as are normally sold by tenant in its Trak Auto stores.” In Section 8.1 of the lease, Trak Auto covenanted to use the leased premises “only as a Trak Auto store” and for the uses provided for in Section 1.1(L).
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