Jack in the Box (JACK), a quick-service restaurant, sold its struggling Qdoba restaurant chain for $305 million in 2017. As part of the spin off, Jack in the Box entered into a unique agreement in which it guaranteed approximately $30 million in Qdoba restaurant leases until approximately 2032. In the its 2019 10-K, Jack in the Box detailed its obligation:

“In the event Qdoba fails to meet its payment and performance obligations under such guaranteed leases, we may be required to make rent and other payments to the landlord under the requirements of the Guarantees.”

As of September 27, 2020, the maximum amount Jack in the Box may be required to pay was $29.8 million. In its Q4 2020 10-Q, Jack in the Box updated the liability and reminded investors that its obligation to Qdoba may extend beyond 2032:

“As of January 17, 2021, the maximum potential liability of future undiscounted payments under these leases is approximately $27.5 million. The lease terms extend for a maximum of approximately 15 more years and we would remain a guarantor of the leases in the event the leases are extended for any established renewal periods.”

In prior filings, Jack in the Box has said it believes its exposure is limited, in part, because it says Qdoba landlords are required to mitigate any damage by re-letting Qdoba properties in default. In it’s latest 10-Q, Jack in the Box disclosed it has not accounted for the potential liability:

“The Company has not recorded a liability for these guarantees as we believe the likelihood of making any future payments is remote.”

On February 16, 2021, a franchisee that operates 68 restaurants filed for Chapter 11 bankruptcy. Of these restaurants, Jack in the Box subleases 50 of the locations to the franchisee and owns the land and building for the remaining 18 locations. In its latest 10-Q, Jack in the Box revealed new potential liabilities:

“Through the bankruptcy proceedings, a number of these leases may get rejected, resulting in potential impairment costs related to future lease obligations.”

The franchisee is continuing to operate the restaurants as of February 17, 2021 and was current on its obligations with the exception of certain obligations Jack in the Box says aren’t material to its consolidated financial results. But in the latest 10-Q, Jack in the Box warns there may be trouble ahead:

“However, the Company could see negative impacts to our business, in the second quarter results as we work through this franchisee’s bankruptcy.”