## Facts

- Joshua Slocum, Ltd., a retail tenant, leased space for a 10-year term in the “Denney Block,” a planned retail development in Freeport, Maine, owned and managed by George Denney.
- The Denney Block consisted of multiple stores in several nearby buildings developed under a common scheme, with coordinated features and a parking area serving the tenant businesses.
- The lease contained (1) a percentage-rent provision tied to gross sales above a threshold and (2) an “average-sales” termination clause (paragraph 20) permitting either party to terminate after six years if the tenant’s average annual sales fell below a stated amount.
- The debtor filed a Chapter 11 petition; the bankruptcy court later appointed a Chapter 11 trustee.
- The trustee sought to assume and assign the lease under 11 U.S.C. § 365 as part of the estate’s disposition strategy.
- The landlord objected, contending that (1) the Denney Block was a “shopping center” under § 365(b)(3) and (2) paragraph 20 was a material economic term that could not be removed to facilitate assumption and assignment.
- The bankruptcy court held the Denney Block was not a “shopping center” and ordered paragraph 20 excised, then approved assumption and assignment of the lease without that clause.
- The district court summarily affirmed; the landlord appealed.

## Issues

1. Whether the Denney Block qualified as a “shopping center” under 11 U.S.C. § 365(b)(3).
2. Whether the bankruptcy court had authority under § 365 to excise a bargained-for average-sales termination clause and approve assumption and assignment of the modified lease.

## Decision

- The Third Circuit reversed and remanded.
- The court held the Denney Block was a “shopping center” for purposes of § 365(b)(3) despite its open, Main Street configuration.
- The court held the bankruptcy court exceeded its authority by excising paragraph 20 and authorizing assumption and assignment of a substantively altered lease.

## Legal Principles

- “Shopping center” status under § 365(b)(3) turns on functional characteristics (planned, unified, multi-tenant retail development and related economic features), not on whether the premises are an enclosed mall versus an open Main Street setting.
- When a debtor assumes an unexpired lease under § 365, it must assume the lease as a whole, taking burdens with benefits; courts may not rewrite substantive, bargained-for terms as a condition of assumption.
- A performance-based sales/termination provision in a retail lease is not automatically an invalid anti-assignment restriction under § 365(f); treating such a provision as severable may impermissibly alter the economic allocation of risk between landlord and tenant.
- In shopping-center leases, § 365(b)(3) reflects heightened protection for the landlord’s contractual expectations, and assumption/assignment must respect those protections.

## Conclusion

The Third Circuit required that the lease be evaluated under § 365(b)(3) because the Denney Block was a shopping center and held that § 365 does not permit a bankruptcy court to excise a central sales-based termination clause to enable assumption and assignment; any assignment had to proceed, if at all, on the lease’s original terms subject to the statutory shopping-center requirements.


In re Joshua Slocum, Ltd., 922 F.2d 1081 (3d Cir. 1990)