The much-ballyhooed COVID relief bill passed by Congress at the end of last year, in addition to providing for $600 checks to millions of people, includes several COVID-related amendments to the U.S. Bankruptcy Code. Some of these changes will have a significant direct impact, at least temporarily, on the rights of commercial landlords and tenants in chapter 11 cases.
- The bill amends Section 365(d)(4) of the Bankruptcy Code, which provides that a commercial property lease is deemed rejected unless it is assumed by a debtor within 120 days following the filing of the bankruptcy case. The 120 day period has been increased by an additional 90 days, so that a debtor will now have 210 days after commencing the case to decide whether to assume or reject a commercial property lease.
- Under existing law the bankruptcy court already has the discretion at the request of a debtor to increase this period by 90 days; accordingly, a debtor can now have up to 300 days to decide whether to assume or reject the lease.
- This change to the Bankruptcy Code will sunset in two years, but will continue to apply in subchapter V small business chapter 11 cases commenced before the sunset date of December 27, 2022.
- The bill also amends Section 365(d)(3) of the Bankruptcy Code to extend the time for a debtor to pay rent under a commercial real property lease. This change will apply only to subchapter V small business chapter 11 cases.
- Under existing law, a debtor must begin complying with its lease obligations no later than 60 days after commencing the case. Under this amendment, if the bankruptcy court finds the debtor has experienced and is continuing to experience a material financial hardship, directly or indirectly, as a result of the COVID-19 pandemic, the court may extend this period by an additional 60 days.
- Any claim arising from such extension shall be treated as an administrative priority expense for purposes of confirmation of a chapter 11 plan in a subchapter V small business chapter 11 case.
- This change will sunset on December 27, 2022, but will continue to apply to any subchapter V small business chapter 11 bankruptcy case commenced before that date.
- Another important amendment is a change to Section 547 of the Bankruptcy Code, which allows a debtor or a trustee to recover payments made by the debtor during the 90 day period prior to the commencement of the bankruptcy case.
- Current law permits the recovery (subject to certain defenses) of payments on account of existing obligations made within such 90 day period that were outside of the ordinary course of business.
- The amendment will protect a commercial landlord from possibly having to return any such payments if they were made under an agreement to defer rent subsequent to March 13, 2020.
- The change is intended to encourage rent deferral arrangements between landlords and tenants. It applies only to rent payments, and not to the payment of fees, penalties, or interest the debtor may otherwise have owed without the deferral.
- This change will also sunset on December 27, 2022, but will continue to apply to any bankruptcy case commenced before such date.