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 for under the lease, the landlord should consider filing a motion for an administrative claim.

In drafting the Bankruptcy Code,  Congress intended for tenants who remain in possession of property to abide by the terms of the lease.  If the debtor-tenant maintains possession and use of the property,  the tenant is receiving a benefit and the landlord is entitled to an administrative expense claim.  Although the landlord is entitled to the “fair market value” for purposes of determining the amount of its claim, there is a presumption that the rental amount provided in the lease represents fair market value. If the tenant believes it is entitled to pay an amount less than the rate provided for in the lease, it has the burden of showing why the contract rate is not fair market value.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

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 landlord with adequate assurance,  the landlord has cause to object to the assignment.

Bankruptcy courts often apply the “business judgment” standard when considering whether to allow a tenant to assume and assign a lease. Under this standard, debtor-tenants are permitted to assign a lease provided it can show the transfer of the lease is a reasonable business decision.  Although courts provide debtor-tenants with broad discretion on the decision of whether to assume and assign a lease, the debtor-tenant must still demonstrate the assigned party’s ability to cure defaults under the lease and make future payments.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

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 must provide “adequate assurance” to the landlord that the debtor will be able to perform under the lease going forward.  The tenant’s obligation to cure defaults includes the payment of late charges or similar charges that arise under the lease.  As discussed in section 8 below,  the landlord may be able to recover attorney’s fees in limited circumstances.

The Bankruptcy Code requires the tenant to demonstrate its ability to provide “adequate assurance of future performance.”  Though this term is not defined within the Code, it has generally been interpreted to require the tenant to demonstrate its ability to meet its financial obligations under the terms of the lease going forward.

A debtor-tenant must serve the landlord with notice of its intention to assume the lease.  Tenants often list the cure amount within a motion to assume the lease.  However, the Code also allows the debtor-tenant to provide notice of the Landlord’s intent to assume the lease as part of the debtor’s plan of reorganization.  Regardless of the method the debtor selects,  under either approach the landlord has only a limited amount of time to review and file an objection to the assumption of its lease and/or the proposed cure amount. If the landlord chooses to object to the assumption of its lease, it needs to file a written objection with the court.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

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.” Under Section 502(b)(6) of the Bankruptcy Code, the landlord is entitled to rent due under the rejected lease for the greater of (i.) one year’s rent, or (ii.)  fifteen percent (15%) of the rent due under the lease, not to exceed three years’ rent.  Unlike the administrative rent claim, a rejection damage claim is a general non-priority unsecured claim paid only after all other claims.

The landlord’s rejection damage claim is capped under Section 502(2)(b)(6), but the landlord is entitled to include all amounts that constitute “rent” under the lease.  Items that may include “rent” include utility fees, common area maintenance charges and taxes.

The Bankruptcy Code views a rejected lease as one that is in breach by the tenant.  To preserve its rejection damage claim, the landlord needs to prepare and file a proof of claim.  This differs from the procedure for administrative rent claims, which generally requires the landlord to file a motion for allowance and payment of the administrative rent claim.  Once the rejection damage claim is properly filed with the court, the claim is deemed allowed unless the debtor-tenant, or another interested party, files an objection to the claim.  Only claims that are “allowed” are eligible for payment, and again, only if funds are available.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

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 many of the other claims against the debtor.  Creditors holding an administrative claim against the debtor will receive payment on their claims before “unsecured creditors,” to the extent funds are available.

Should the debtor-tenant fail to pay the rent as provided under the lease, the landlord should file a motion for payment of post-petition rent with the bankruptcy court and/or a motion for relief from automatic stay.  The rent motion in some instances can be heard within thirty to sixty days from the date in which it was filed.  However, if an evidentiary hearing is needed to resolve issues pertaining to the administrative rent claim,  the motion could require several months before the court issues a decision.

Instead of seeking payment of rent, landlords may file a motion for relief from the automatic stay.  With this alternative, the landlord seeks an order from the court allowing the landlord to enforce its rights under the lease due to the tenant’s breach (such as evicting the defaulting tenant).

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

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 collect unpaid rent, or seek eviction, setoff, lease termination or foreclosure, among others.

It is important for landlords to realize that the automatic stay becomes effective without notice or a hearing.  Were a landlord (or any creditor) 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.

In order to avoid the consequences resulting from violating the automatic stay,  landlords should seek relief from the stay by filing a motion with the bankruptcy court.  Under Section 362 of the Bankruptcy Code, creditors can seek relief from the automatic stay “for cause.” An example of “cause” includes the tenant’s failure to pay rent.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Once a tenant files for bankruptcy, it has three options regarding the lease:

  1. Assume the lease and continue performing all obligations, or
  2. Assume and assign the lease to a third party, or
  3. Reject the lease and surrender the premises and terminate performance.

Section 365 of the Bankruptcy Code gives the bankrupt tenant 120 days to decide if it will assume or reject the lease. During this period, the tenant can request one 90 day extension of time to decide whether to assume or reject. After the extension period expires, any further extensions require written consent from the landlord.

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 by operation of law. This is a significant provision for landlords and one of several reasons why landlords should stay fully informed as to the debtor-tenant’s intentions regarding its lease.

To be proactive, landlords (or their counsel) 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.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Introduction

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 have the potential to generate substantial revenue through the assumption and assignment of leases.

History Behind Preferential
Treatment For Shopping Centers

Years ago, Congress recognized the potential risks landlords faced should a debtor in bankruptcy have broad discretion to assign leases. To address this concern, Congress included language in the Bankruptcy Code requiring a debtor to provide a landlord with “adequate assurance of future performance” that the party receiving the lease performs according to the terms of the lease.

In 1978, Congress increased the protections governing the assignment of shopping center leases. The 1978 revisions to the Bankruptcy Code were intended to not only protect the owners of shopping centers, but also protect the remaining tenants within a shopping center once a tenant files for bankruptcy. Congress had three primary concerns when a tenant in a shopping center filed for bankruptcy:

1. Reduce any hardship imposed on the landlord and tenant due to
a vacancy, or reduction in operation, due to the assignment of the
lease to a third party;

2. Increase the likelihood that the owner of the shopping center
receives rental payments for rent arising before and after the
assignment of the lease, and,

3. Insure that the tenant mix is not disturbed by the assignment
of the lease to a third party.

Heightened Protections
Provided To Shopping Centers

Under the Bankruptcy Code, before a tenant in a shopping center lease can assign the lease to a third party, the party acquiring the assigned lease must provide proof of its ability to pay rent and that the percentage rent due under the lease will not decline substantially. Further, the assignment of the lease cannot result in a breach of radius, location, use or exclusivity provisions in the lease, nor can the assignment disrupt the current tenant mix.

These additional requirements provide shopping center landlord’s with greater protection than other non-shopping center landlords who have a tenant in bankruptcy. In essence, the protections increase the likelihood that the terms and intent of the lease are satisfied. Equally important, the heightened protections for shopping center leases increase the likelihood that a landlord will receive payment under the lease. Interestingly, when amending the Bankruptcy Code, Congress chose not to define what constitutes a “shopping center.” Instead, courts must decide on a case-by-case basis after considering the facts presented.

What is a Shopping Center?

With Congress unwilling to define what constitutes a shopping center under the Bankruptcy Code, Courts have stepped in and applied a broad definition. Some of the factors that support a finding that a property is a shopping center include (i.) whether the leases are held by a single landlord; (ii.) the existence of a common parking area; (iii.) the existence of percentage rent provisions in the lease; and, (iv.) the inclusion of tenant mix requirements in the lease.

Notice that aside from a common parking area, the physical attributes of the property are not determinative of whether a property is a shopping center. Courts reject the idea that the physical features of a property determine whether the landlord will receive the additional protections afforded to shopping center leases. Instead, the intent of the parties, as expressed through the terms of the lease (i.e. the inclusion of percentage rent, joint waste removal, etc.) determine whether the lease is a shopping center lease.

Ways Landlords Can Receive The
Added Protections of “Shopping Center” Leases

Before a debtor can assign its lease, it must file a motion with the court seeking authority to assume and assign the lease. Once a landlord learns that its tenant intends to assign its lease, it should make sure that the party purchasing the lease can provide “adequate assurance” that the new tenant can satisfy the terms of the lease. If a landlord does not receive adequate assurance, it should consider filing an objection to the proposed assignment. Landlords whose lease satisfies some of the criteria of a “shopping center” should assert their rights to greater protection under the Bankruptcy Code. Doing so will improve the likelihood that the terms of the lease are met.
 

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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