WHEN THE TENANT FILES BANKRUPTCY

I. Before the Bankruptcy is Filed.

The Bankruptcy Code, found at 11 U.S.C. §§ 101, et seq., creates a category of rights known as “executory contracts.” An executory contract, in simple terms, is a contract for which there is material performance remaining due from both sides. Whether or not a contract is executory depends on its status as of the filing of the bankruptcy petition. A lease of real property that has not been terminated is a quintessential executory contract. Thus, a lease will be subject to being either assumed or rejected by the trustee or, more often, a debtor in possession. This may or may not be a good result for the lessor.

A. Lease Provision

Many form leases contain clauses that are utterly unenforceable in bankruptcy. Other provisions could be included that provide much more protection but are often ignored.

1. Bankruptcy Termination Clauses. Clauses which purport to terminate or modify a lease upon the filing of a bankruptcy are rendered unenforceable by the Bankruptcy Code. Because the invalidation applies to both the filing of bankruptcy as well as the financial condition of the debtor, provisions that are triggered by mere insolvency or the failure of financial covenants would be unenforceable as well....