Section 365(d)(3) of the Bankruptcy Code requires the debtor-tenant to “timely perform all the obligations …. under any unexpired lease of nonresidential real property” until such time that the tenant assumes or rejects the lease. If a tenant files for bankruptcy and remains in possession of the property, yet fails to pay rent as provided
What are the landlord’s rights when the tenant assumes and assigns the lease to a third-party?
In conjunction with assuming the lease, the Bankruptcy Code allows the debtor-tenant to assign the lease to a third party. The party who is assigned the lease must provide the landlord with adequate assurance that it can meet the financial obligations of the lease. If the party who is assuming the lease cannot provide the…
What are the landlord’s rights when the debtor-tenant decides to assume the lease?
Assumption of the lease is permissible even if the terms of the lease expressly prohibit assumption. Section 365 of the Bankruptcy Code requires a debtor-tenant to meet certain criteria in order to “assume” a lease. First, and most importantly, the tenant must cure any and all existing defaults, both monetary and non-monetary. Second, the debtor-tenant…
What are a Landlord’s “Rejection Damages?”
If the debtor-tenant seeks to terminate and surrender the lease, that is “reject it”, the landlord may be entitled to a “rejection damage” claim. A landlord is not entitled to the full amount of unpaid obligations for the balance of the lease. Instead, Section 502(b)(6) limits the recovery a landlord may receive for “rejection damages.”…
What is the Status of a Tenant’s Rental Obligations While Landlord is in Bankruptcy?
Section 365(d) of the Bankruptcy Code requires the debtor-tenant to satisfy all the terms under the lease during the post petition period until the tenant either rejects the lease, or assumes and assigns it to a third-party. The landlord’s claim for unpaid rent receives “administrative claim” status, which is a higher priority of claim than…
How does the “automatic stay” of the bankruptcy code apply to landlords?
The automatic stay is one of the most powerful protections provided to debtors in a bankruptcy proceeding. The stay acts as an injunction that prohibits creditors (including landlords) from commencing or continuing any proceeding against the debtor which could have been commenced prior to the bankruptcy. Applied to landlords, the automatic stay prohibits efforts to…
What Effect Does a Tenant’s Bankruptcy Have on a Lease?
Once a tenant files for bankruptcy, it has three options regarding the lease:
- Assume the lease and continue performing all obligations, or
- Assume and assign the lease to a third party, or
- Reject the lease and surrender the premises and terminate performance.
Section 365 of the Bankruptcy Code gives the bankrupt tenant 120 days to…
Shopping Centers Receive Preferred Treatment Under the Bankruptcy Code
When a company files for bankruptcy, often it will reject some or all of its commercial leases. Alternatively, some debtors in bankruptcy choose to assume and assign their leases to third parties. By assigning its lease, the debtor is in essence selling its lease to the highest bidder. Large retailers who file for bankruptcy…
Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy
As the economy fluctuates, tenant bankruptcies become a greater risk for commercial landlords. Yet some landlords are not familiar with the rights provided to them under the Bankruptcy Code, nor are they aware of the protections provided to a tenant in bankruptcy. For example, certain lease provisions are unenforceable once a tenant files for bankruptcy. Should a landlord attempt to exercise its rights under the lease without first seeking approval from the bankruptcy court, the landlord may be subject to strong sanctions. The purpose of this article is to provide landlords with the questions and answers they should consider when a commercial tenant files for bankruptcy.
1. What effect does a tenant’s bankruptcy have on the lease?
Once a tenant files for bankruptcy, it has three options regarding the lease: it can assume the lease and continue performing all obligations, or assume and assign the lease to a third party, or reject the lease and surrender the premises and terminate performance. The Bankruptcy Code gives the debtor-tenant 120 days to decide whether to assume or reject the lease. During this period, the tenant can request one 90 day extension to decide what to do with the lease.
If the debtor-tenant fails to assume or reject the lease within the 120 day period, and no extension is granted, the lease is deemed rejected. This is a significant provision for landlords. To be proactive, landlords should review all pleadings filed in the tenant’s bankruptcy proceeding to see if the debtor-tenant sought an extension of time to assume or reject. Additionally, landlords should review the tenant’s motions to assume, motions to assume and assign, as well as motions to reject leases. The exhibits to these motions often contain schedules identifying the leases affected by the motion.
2. How does the “automatic stay” of the Bankruptcy Code apply to landlords?
The automatic stay is one of the most powerful protections provided to debtors in a bankruptcy proceeding. The stay acts as an injunction that prohibits creditors (including landlords) from commencing or continuing any proceeding against the debtor which could have been commenced prior to the bankruptcy. Before a landlord seeks to enforce its rights under the lease (such as through eviction, termination or foreclosure), the landlord should seek “relief” from the automatic stay by filing a motion with the bankruptcy court.
It is important for landlords to realize that the automatic stay becomes effective without notice or a hearing. Were a landlord to be found in violation of the automatic stay, the debtor-tenant may be able to recover actual damages from the landlord, including attorneys’ fees. If the violation is found to be intentional, the debtor-tenant may recover punitive damages.
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