Lease Termination: Do You Really Mean It?

by Pepper Hamilton LLP
Contact

In re 2408 W. Kennedy, LLC, 512 B.R. 708 (Bankr. M.D. Fla. 2014)

A commercial landlord sought relief from the automatic stay so that it could complete prepetition eviction proceedings against the debtor. The debtor objected, arguing that it had a right to assume the lease. The case turned on whether the landlord effectively terminated the lease prepetition.

The debtor operated a nightclub at a location that it leased from the landlord. The landlord sent the debtor a default notice for failure to make lease payments and on the basis that the debtor defaulted on a promissory note that constituted a default under the lease through a cross-default provision.

Based on the cross-default, the landlord contended that the lease was “no longer in effect” and the debtor was “occupying the premises as a Tenant at Will.” (There is an inference that the landlord relied on the cross-default because under state law the tenant would have had a right to cure the lease payment default and reinstate the lease.)

The landlord also insisted that the debtor continue paying rent under a supposed month-to-month tenancy. When the debtor failed to pay rent, the landlord gave a short pay-or-quit notice, and when the debtor again failed to pay, the landlord sued to recover possession of the premises.

A state court entered an order obligating the debtor to pay both past due rent and ongoing rent into the court registry. After the debtor was late on a payment by less than a day (due by 5:00 p.m. one day, but not deposited with the court until 8:00 a.m. the next morning), the court entered a default judgment for possession and issued a writ of possession. After considering the debtor’s request for reconsideration, the court ordered the debtor to vacate the premises. One day before the deadline for vacating, the debtor filed bankruptcy.

The landlord requested relief from the automatic stay, arguing that the bankruptcy case was a bad-faith filing since the debtor needed the premises to operate its nightclub, but could not assume the lease because it was terminated prepetition. While acknowledging that it could not assume a terminated lease, the debtor disputed that the lease was terminated. The landlord argued that the lease was terminated either (1) when it notified the debtor of the cross-default, or (2) when the state court entered a judgment for possession and issued a writ of possession.

Addressing the procedural argument, the bankruptcy court determined that under state law the lease was not terminated by entry of a final judgment for possession or issuance of a writ of possession.The court reasoned that there are typically three remedies for default under applicable state law: (1) terminate the lease and take possession, (2) take possession for the account of the tenant and hold the tenant accountable for the difference between rent that was due and what the landlord actually received, and (3) sue the tenant for rent as it becomes due. The court saw this as clear confirmation that simply retaking possession does not terminate a lease (since it was also consistent with acting for the tenant’s account).

There was an additional argument that a debtor cannot assume a lease if the debtor has lost possession regardless of whether the lease is terminated. However, a tenant does not lose possession under state law until the writ is executed, and until then a tenant can prevent removal by tendering any rent in arrears with interest. So the lease is not terminated and the debtor can still assume the lease even if a judgment for possession has been entered and/or a writ of possession has been issued.

As for the supposed termination based on the promissory note cross-default, the court did not agree that the landlord established that there had been a default. The debtor apparently made all of the monthly payments due under the note. The supposed default was based on a failure to pay late charges of $169.26 – since payments were due on the 5th of each month and the debtor paid on the 7th one month. However, late charges were not automatic under the note, and the noteholder did not assess late charges until after the bankruptcy was filed. Consequently, the landlord did not have a basis for terminating the lease prior to bankruptcy.

Furthermore, even if the debtor had defaulted under the note, the landlord did not prove that it effectively terminated the lease. The landlord’s conduct following the notice purporting to terminate the lease did not acknowledge the termination. Based on its ambiguous conduct, the court concluded the landlord did not establish that it effectively terminated the lease.

Since the landlord failed to establish that the debtor defaulted on the note, its default notice did not effectively terminate the lease, and the debtor still had a leasehold interest with a right to assume the lease (assuming it was able to satisfy the applicable Bankruptcy Code criteria for assumption). Accordingly the landlord’s request for stay relief was denied.

If a landlord wants to terminate a lease prior to a potential bankruptcy to prevent a debtor from having the ability to assume the lease, it should take clear, affirmative steps to do so. This desire is often in tension with a desire to continue to collect rents to the extent possible. Landlords should recognize that sometimes they have to make a choice. On the tenant side, it is good to remember that timely means timely. Being late by even a little bit can have significant consequences.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pepper Hamilton LLP | Attorney Advertising

Written by:

Pepper Hamilton LLP
Contact
more
less

Pepper Hamilton LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!