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Thursday, August 12, 2010

Dealing with the Bankruptcy of Your Commercial Landlord or Tenant

Dealing with the Bankruptcy of Your Commercial Landlord or Tenant

With the economy seemingly in a tailspin, even comparatively healthy businesses are being affected by thebankruptcy of other companies with which they have a landlord-tenant relationship.  For commercial landlords faced with the bankruptcy of a business tenant, the questions usually revolve around will I get paid and, if not, how can I get this deadbeat out?  For tenants, the bankruptcy of a landlord raises the even more basic question:  so now, what?   Either way, section 365 and section 502 of the Bankruptcy Code have the answers.
>>> 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.
     2.     Expect to Receive Post-Petition Administrative Rent If Tenant Does Not Vacate Premises.  If a business tenant remains in possession of premises after filing bankruptcy, the landlord is entitled under section 365(d)(3) of the Bankruptcy Code to rent at the contract rate payable according to the terms of the lease until such time as the debtor tenant rejects the lease, surrenders and vacates the leased property.  The debtor is expected to make immediate timely payment of these amounts as they come due.  The amount of this post-petition rent is an administrative claim entitled to priority  in payment over other unsecured claims; it's up there with taxes and the debtor's attorneys fees.
  • 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.
     3.     Know Your Rights If the Debtor Tenant Wants to Assume or Assign the Lease.  Before an unexpired lease of nonresidential real property can be assumed or assigned, Bankruptcy Code section 365(b) requires the following:
  • 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
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).

  • 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. 
  • 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.
     5.      Don't Forget to File a Proof of Claim for Prepetition Unpaid Rent .   In addition to lease rejection damages and any applicable administrative rent, a landlord of nonresidential real property is entitled to anunsecured claim pursuant to section 502(b)(6)(B) for unpaid rent due and owing to the landlord from the debtor tenant  as of the day the bankruptcy petition was filed.
 >>> 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.

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