Will the “Return to Normalcy” Increase Tenants Seeking Bankruptcy Relief?

Jennings, Strouss & Salmon, PLC
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Presently no moratorium or mandate that prevents a commercial landlord from evicting a tenant in default exists.  Federal and local governments have encouraged landlords to work with their tenants during the evolving impact of the COVID-19 pandemic.  In contrast, residential tenants have been afforded a moratorium until at least June 30, 2021, in most instances.  That said, some courts have recently issued rulings deeming the Center for Disease Control’s orders related to the eviction moratorium as unconstitutional.  Unless further extended or altered, it is likely in the next 60 to 90 days there will be a significant uptick in evictions, foreclosures, and possible bankruptcies.  With that in mind, below are the Top Five Tips for Commercial Landlords in response to a tenant filing bankruptcy.

First, if possible, plan ahead.  A third-party guarantor is one way a landlord may obtain better creditor protection when entering into a lease.  The Bankruptcy Code does not prevent a landlord from taking action against a guarantor to a corporate tenant-debtor’s lease, provided the lease guarantor is not in bankruptcy.  As highlighted below, once a tenant files for bankruptcy, it alters the landscape of enforcing the landlord’s rights.  Thus, it is important that the landlord stay informed regarding the status of the bankruptcy.

Second, the automatic stay is just that, automatic.  A tenant-debtor that files bankruptcy does not need to take further action to affirm the automatic stay applies.  The automatic stay protects a debtor during the pendency of a bankruptcy proceeding unless terminated by the bankruptcy court.  Landlords should not take any action to violate the automatic stay, such as filing a lawsuit against the debtor, continuing, a pending lawsuit against the debtor, or making demands to collect unpaid rent. Failure to abide by the protections of the automatic stay may subject a landlord to sanctions and punitive damages.

Third, if the debtor remains in the leased space, the debtor must fulfill all of its obligations as stated in the lease, including making timely post-bankruptcy payments.  If the debtor does not remit timely post-bankruptcy payments, the landlord will need to pursue a motion for an administrative claim for the value of post-bankruptcy payments.  An administrative claim has a higher priority ahead of other creditors in line for distribution from the tenant-debtor.

Fourth, assumption, assignment, or rejection of the lease.  The tenant-debtor has the choice to either assume the lease for itself, assume and assign the lease to a third party, or reject the lease. These actions trigger important deadlines of which any landlord should be acutely aware.  Each of the tenant-debtor’s options mentioned has varying implications.

Fifth, file a proof of claim with the bankruptcy court.  It is common in the months leading to a bankruptcy filing that the tenant-debtor will fall behind in its rental payments. Shortly after the bankruptcy is filed, a debtor is required to file its schedules of assets and liabilities with the bankruptcy court, which lists all debts owed by the debtor before the filing of the bankruptcy. If the amounts owed to the landlord are not listed, or the amount listed is incorrect, then a proof of claim must be timely filed by the landlord.

In conclusion, the landlord’s rights and the tenant-debtor’s options mentioned each have varying legal implications.  Therefore, it is highly recommended that landlords retain counsel for advice and guidance when a tenant-debtor files for bankruptcy. 

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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