Federal Consolidated Appropriations Act Alters Commercial Landlord Rights Under Bankruptcy Code

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The Consolidated Appropriations Act of 2021 (CAA) was signed into law on December 27, 2020, after receiving overwhelming bipartisan support. The Act, in addition to providing appropriations for various government departments, as well as coronavirus stimulus, made a number of changes to the Bankruptcy Code (Title 11 of the United States Code). Landlords of commercial properties should be aware of certain changes directly impacting their rights under the Bankruptcy Code. The amendments addressed below, however, are temporary and, absent further legislation, will expire on December 27, 2022.

First, the CAA amends Section 365(d)(4)(A) of the Bankruptcy Code. That section, prior to amendment, provided that a trustee or debtor in possession had 120 days after the order for relief (i.e., the bankruptcy filing date in a voluntary case) to assume or reject an unexpired lease of non-residential real property, subject to further extension. The CAA extended the 120-day period to 210 days, subject to further extension by order of the court as currently provided by the Bankruptcy Code. This amendment applies in all Chapters of the Bankruptcy Code. It will allow debtors to continue to operate in leased premises for nearly seven months without making a final decision to assume or reject the lease.

Second, the CAA amends the time within which a trustee or debtor in possession must perform the debtor’s obligations (i.e., pay rent), under a lease of non-residential real property in a Subchapter V Chapter 11 case. As addressed in prior blog posts, Subchapter V applies only to business debtors, both corporate entities and individuals, with smaller debt burdens and that meet other requirements. Prior to amendment, Section 365(d)(3) provided generally that the trustee or debtor in possession “shall timely perform” all obligations of the debtor after the order for relief, subject to extension by the court for cause shown. An extension may not extend beyond 60 days after the order for relief. The CAA added a new subsection (B) to Section 365(d)(3), limited to Subchapter V cases. That addition permits a bankruptcy court to further extend the 60-day period if the Subchapter V debtor “is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic.” Under other provisions of Subchapter V, the debtor potentially could spread out the delayed rental payments over a period of several years following plan confirmation.

Third, the CAA amends the preferential transfer provisions of the Bankruptcy Code. It prohibits lawsuits by a trustee against landlords to recover certain prepetition payments under a lease of non-residential real property, where, among other things, the payments received by the landlord are arrearage payments under an agreement between the landlord and debtor.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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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.

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