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J.C. Penney Co. Inc.’s landlords reached a tentative deal to rescue the beleaguered department store chain from bankruptcy proceedings, averting a liquidation that would have threatened roughly 70,000 jobs and represented one of the most significant business collapses following the coronavirus pandemic, a company lawyer said during a brief court hearing Wednesday.

Mall owners Simon Property Group Inc. and Brookfield Property Partners LP have teamed up to acquire J.C. Penney’s retail operations and are putting the finishing touches on an agreement, Joshua Sussberg, a Kirkland & Ellis LLP lawyer representing the company said, confirming an earlier Reuters report.

The landlords are poised to put US$300-million toward the rescue and have agreed to a nonbinding letter of intent with J.C. Penney, he said.

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J.C. Penney plans to move at “lightning speed” to seek approval of the deal from a bankruptcy judge in early October, Mr. Sussberg said. “We are in a position to move this in the endzone,” he told U.S. Bankruptcy Judge David Jones, noting that previous talks were in the “red zone” before faltering and then gaining renewed traction.

The restructured retailer is expected to operate about 650 stores, people familiar with the matter previously told Reuters.

Hedge funds and private-equity firms financing J.C. Penney’s bankruptcy, meanwhile, would take ownership of 161 stores and separate distribution centres after forgiving portions of the Plano, Tex.-based company’s US$5-billion debt load, Mr. Sussberg said. The lenders, led by H/2 Capital Partners, would own those assets in two separate real estate investment trusts.

J.C. Penney is also in discussions with lenders for roughly US$2-billion to finance its emergence from bankruptcy proceedings, Mr. Sussberg said. The iconic 118-year-old retailer, which went public at the start of the Great Depression, filed for bankruptcy in a Texas court in May after the pandemic forced it to temporarily close its then nearly 850 stores.

Should it survive, J.C. Penney will have withstood unprecedented economic turmoil stemming from the pandemic and bankruptcy proceedings that have felled other retailers during less fraught times. In recent years, Toys 'R' Us Inc. and Barneys New York Inc. failed to reorganize under bankruptcy protection and liquidated.

A deal is not yet completed, Mr. Sussberg cautioned. Talks with the landlords have hit roadblocks before, and the parties engaged in screaming matches as recently as Wednesday, he said. Negotiations continued during phone calls moments before the court hearing, he added.

If the discussions fall apart, J.C. Penney would likely be on course for liquidation, people familiar with the negotiations said. Mr. Sussberg expressed optimism a deal would be codified and the judge encouraged the parties to keep working to seal an agreement.

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Simon, Brookfield and a lawyer for the lenders did not respond to earlier requests for comment.

J.C. Penney’s survival hinges on the sale negotiations, which have consumed the summer and drawn urgent directives from the company’s bankruptcy judge for parties to set aside what he labelled egos and negotiating postures to consummate a deal to save the beleaguered retailer.

The talks have dragged on for weeks in part amid haggling over lease terms, the people said. In late August, the discussions with Simon and Brookfield reached an impasse, prompting J.C. Penney to ask lenders to take control of its retail operations in addition to the real estate investment trusts they envisioned owning. After further discussions, the company reached a deal with Simon and Brookfield to buy the retail operations.

Any deal would require approval from the company’s bankruptcy judge and potentially be subject to competing bids in a court-supervised auction. Private equity firm Sycamore Partners and Saks Fifth Avenue owner Hudson’s Bay Co. also vied for J.C. Penney’s retail business earlier this summer, according to people familiar with the matter.

For Simon and Brookfield, the deal talks reflect a dramatic shift following the pandemic that is pushing them to rescue faltering retailers occupying malls they own across the United States. The demise of large tenants such as J.C. Penney would deprive them of rent and also potentially trigger contract clauses allowing other retailers to pay them less or break their leases altogether, further darkening malls.

Simon, the largest mall operator in the United States, has already this year negotiated separate deals to rescue the two-centuries-old men’s apparel clothier Brooks Brothers and denim retailer Lucky Brand from bankruptcy. Brookfield in May said it would devote US$5-billion to non-controlling investments designed to revitalize retailers struggling in the wake of the coronavirus outbreak.

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The pandemic has forced Neiman Marcus Group and J. Crew Group Inc. to seek bankruptcy protection, and even retailers that have avoided restructurings, such as Gap Inc., have at times stopped paying rent or tried to negotiate lower payments.

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