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Tellatin, Short, Hansen & Clark, Inc.

Seniors Housing and Healthcare Valuations, Market Studies and Consulting Services

"Understanding preferences for seniors housing is key to understanding demand."

- Mark Hansen

Case Study - Court Verdict on "Fair Use and Occupancy"

In the Integrated Health Services Inc. voluntary bankruptcy, leases on 43 nursing facilities were rejected. Due to regulatory requirements, debtors continued to operate the facilities post-rejection while they tried to find new operators.

Litchfield filed a motion seeking to compel debtors to pay rent at the amount set forth in the leases for the period after the leases were rejected but before debtors left the premises.

The court noted that when a lease has been rejected and the debtor continues to use the property, the landlord is entitled to an administrative claim for the "fair use and occupancy" of the premises. The amount due for fair use and occupancy is the fair rental value of the property at the time of rejection.

Both parties presented expert testimony on the fair rental value of the facilities. Debtors' expert, opined that the fair rental value of the facilities was between eight and $10 million per year, based on his conclusion that it should be no more than 50 percent of earnings before interest, taxes, depreciation, amortization, rent and management fees (EBITDAR). The court rejected this testimony as unreliable

In contrast, the court found that Litchfield's expert, James Tellatin, was credible. Tellatin, a certified appraiser, opined that the fair rental value of the facilities was $20.8 million per year, concluding that the fair rental values were approximately 95.7 percent of EBITDAR. The court therefore granted Litchfield's motion to compel debtors to pay rent of $20.8 million per annum prorated for the relevant period after rejection.

Read the full article in Delaware Law Weekly.