>>> If You Are a Commercial Landlord of Nonresidential Real Property with a Tenant Who Has Filed Bankruptcy...
1. Remember the Automatic Stay! Section 362 of the Bankruptcy Code imposes an injunction-like automatic stay which prevents a landlord from commencing or continuing any eviction or collection action against a delinquent tenant. This applies in all bankruptcy cases, whether Chapter 7, 11,12, or 13. Contempt charges, fines, and in extreme cases, even jail, can result from vi9olations of the automatic stay.
- EXCEPTION - If the lease has in fact actually been terminated BEFORE the date the bankruptcy petition, Bankruptcy Code sections 362(b)(10) and 541(b)(2) allow actions to recover possession of the premises to proceed. Collection actions to recover money judgment would still be stayed.
- In Chapter 7 cases, the lease is automatically deemed rejected in 60 days unless the trustee has sought and obtained additional time within which to make a decision regarding how to handle the lease. Section 365(d)(1).
- If administrative rent is not promptly and timely paid, it may be necessary to file a motion seeking relief from stay.
In addition, the lease must be assumed as a whole; the debtor tenant is not allowed to modify or cherry-pick the terms it wishes to have included and reject the remaining terms. It is also important to rememeber that, in a change made in 2005 by Congress, the debtor tenant must make a decision concerning whether to assume or assign a lease within 120 days after the date the bankruptcy petition is filed; the debtor may obtain one 90 day extentsion of this deadline, but that is all. If no decision is made, the lease is deemed rejected. Section 365(d)(4).
- All monetary defaults must be cured.
- "Adequate assurance" must be provided that any nonmonetary defaults will be promptly cured.
- Adequate assurance" must be provided that lease obligations will continue to be satisfied in the future.
- If the property involved is a shopping center, there are some additional specific requirements that must be met pursuant to section 365(b0(30 of the Bankruptcy Code
- This claim will be treated as an unsecured claim, but is in addition to the administrative rent claim discussed above and any unsecured claim to prepetition deliquent rent discussed below.
- Generally, CAM common area maintenace charges and similar aspects of "additional rent' required under a lease are included within the calculation if they are properly designated.
- There is some case law suggesting that a landlord may forfeit this claim if the property is sold after the debtor tenant's rejection of a lease.
- Some recent caselaw also suggests that tort-like damages for damage to the premises may not fall within the cap imposed on lease rejection damages.
- The amount of any security deposit held by a landlord may be used to offset this claim or one for prepetition rent owed, but under section 362(a)(7) of the Bankruptcy Code, relief from stay is needed before doing this.
- A landlord may be able to protect itself by insisting upon a letter of credit which would allow it to receive payment for the remaining rent from a source other than the debtor's bankruptcy estate. However, not all courts agree.
>>> If You Are a Tenant Occupying Nonresidential Real Property and Your Landlord Has Filed Bankruptcy....
1. Don't Panic,,,, Yet. Unless you are subletting - which raises a whole 'nother set of issues - you don't have to vacate the premises. Until a decision is made by the landlord to reject the lease, the landlord remains obligated to comply with its obligations under the lease to you. Also the automatic stay may protect you - at least temporarily -- from any disruptions that might otherwise be caused by creditors of your landlord. And because you represent a source of revenue, it is likely that you will receive the attention of professionals engaged to assist the debtor landlord.
2. If the Landlord Chooses to Assume or Assign Your Lease. Just as a tenant debtor must cure monetary defaults and provide "adequate assurance" of the prompt cure of nonmonetary defaults and of future performance under the lease, so too must the debtor landlord if it wishes to assume or assign the lease with a nondebtor tenant. The Retail Law Observer has this useful post regarding how tenants can take protective action now to strengthen their position in the event of a landlord bankruptcy.
3. If the Landlord Decides to Reject the Lease. Even if the debtor landlord decides to reject a teant's lease, under section 365(h), the tenant still has the option of either (i) treating the lease as terminated and vacating the premises; or (ii) remaining in possession. If the tenant opts to remain, the landlord is not required to perform any of its obligations under the lease, but is entitled to offset any damages cause by the landlord's failure to perform its obligations against the tenant's rent obligations.
4. File a Proof of Claim for Any Damages Not Offset by Rent Obligations. If the landlord fails to perform their obligations under the lease, this may cause a tenant damages. if so, a proof of claim shuld be filed detailing those damages.