The news is full with stories about WeWork’s announcement yesterday that it was seeking to renegotiate almost all of its leases. WeWork CEO David Tolley sent a letter to the landlords stating that they would be leaving unfit and underperforming properties as part of these talks in order to “achieve the sustainable operating model we need”. In his final paragraph, Mr. Olley stated that “WeWork will be here for the long haul”. We will remain a global flex space leader, and trusted real estate partner to our members.”
This unusual gambit was clearly intended to set the tone for negotiations and provide WeWork with the upper hand in the discussions between their real estate advisor Hilco Global and the company’s landlords. As is my wont on these matters, I consulted the general counsel of Wharton Property Advisors Eric Haber who is also a bankruptcy attorney, for his take on the situation.[a]Eric’s view is that once again WeWork is trying to have its cake and eat it too. WeWork, to put it in less colloquial terms, is trying to get the benefits of bankruptcy without having to file a case, which would mean that its shareholders could be wiped out, or have their shares significantly diluted. WeWork has considerable bargaining power, as it announced publicly with its call and the Tolley letter. WeWork’s bargaining power is considerable, as the company announced in its Tolley Letter and public call. WeWork’s leverage comes from what landlords could face in a bankruptcy proceeding. The Bankruptcy Code permits a debtor the right to reject leases. However, the maximum unsecured rejection damages claim by the landlord is limited to the lesser of either (a) a year’s worth of rent or (b), 15% of any remaining rent due under the lease. This can not exceed three years. In many instances, this means that the landlord will receive pennies on the dollar at best.
Further, WeWork has used this playbook several times before. According to the Real Deal, WeWork has renegotiated or cancelled 590 leases since 2019, saving $12.7 billion on leasing costs. However, that obviously did not do the job as the company continues to hemorrhage cash.
Nevertheless, WeWork is back for another bite at the (Big) Apple, where it accounts for approximately 6.4 million square feet of a 414 million square foot square foot market. WeWork’s office footprint has been reduced significantly, so the situation could not have been worse. However, it is adding to the pain the sector is experiencing. Will WeWork’s plan succeed? It remains to be determined.
Any company that is seeking to reorganize, whether in court or out of it, must have a profitable business. According to Mr. Tolley’s letter, lease expenses represent more than 2/3 of WeWork’s operating costs. If they can make meaningful concessions, they may have a chance. We have seen this film before, so only time will tell. We are only at the start of the latest chapter in the fascinating WeWork tale.