United States: What General Counsel Should Know When A Company's Tenant Files For Bankruptcy

Last Updated: August 3 2015
Article by Alexandra Dugan

Your tenant files for bankruptcy-what's your move? Debtors who are lessees under real property leases have certain rights regarding their lease under § 365 of the Bankruptcy Code. Essentially, the debtor has two options: 1) reject the lease or 2) assume the lease, provided that the debtor can cure any defaults existing under the lease. Additionally, the debtor may have the right to assume and assign the lease to a third party.

The company should ensure that its counsel monitors the bankruptcy case regarding several key events and deadlines. In particular, the company should note the deadline for filing a proof of claim. The Bankruptcy Code limits the landlord's claim against the debtor's estate. Generally, a creditor will only be entitled to a general unsecured claim, this is similarly true regarding landlords' claims for prepetition rent. Section 365(g) of the Bankruptcy Code deems the effective date for a rejected lease as occurring "immediately before the date of the filing of the petition," thereby relegating most rejection claims to unsecured status. Additionally, section 502(b)(6) of the Bankruptcy Code provides a statutory "cap" on the amount of the non-accrued damages resulting from the breach of the lease. This section provides that the claim for damages by a lessor under a terminated lease of real property shall be the rent reserved under the lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of the lease, plus any unpaid rent due under the lease, as of the earlier of the date that the lessor surrenders the premises or the bankruptcy petition date. Although a landlord may have an unsecured claim that is capped in the case of a rejected lease, the landlord will likely want to file a proof of claim in such case, especially if there will be any distribution to unsecured creditors.

While the company may not pursue eviction based on the debtor's pre-petition delinquency, the debtor tenant is not entitled to maintain the space "rent free" during the bankruptcy. The tenant is required to pay all rent or other charges that arise during the bankruptcy case. If the debtor does not timely pay its post-petition rent, the landlord will generally be entitled to an administrative priority claim under § 503 of the Bankruptcy Code for the unpaid, post-bankruptcy rent. One question that may arise is what happens when the debtor files for bankruptcy at the beginning of the month, but after its rent payment is due. Must the debtor pay for this partial, post-bankruptcy month? It depends. Some courts will require the debtor to pay the "stub rent" (i.e. the rent due during the post-petition part of the month). However, other courts have determined that the entire month of rent constitutes pre-petition debt such that the debtor will not be obligated to pay as part of its on-going post-bankruptcy rent.

In a Chapter 11 bankruptcy case, the debtor may seek to assume the lease, or assume and assign the lease, particularly if the terms of the lease are favorable and will benefit the debtor in its reorganization efforts. In order to assume the lease, the debtor must cure all monetary defaults existing under the lease at the time of assumption. For example, if the tenant is four months behind on its rent, it must pay this money to the landlord prior to assuming the lease. If there is a non-monetary default, the debtor may be required to cure this type of default as well. The debtor can also assume and assign the lease to a third party, notwithstanding language in the lease that prohibits such assignment, provided adequate assurance of future performance by the assignee is provided.

The debtor must assume or reject a lease on the earlier of i) 120 days after the bankruptcy petition date, or ii) the confirmation date of the debtor's bankruptcy plan. The debtor may seek court approval to extend that deadline for an additional 90 days, which many debtors do. If the landlord wants to expedite the timing of the assumption or rejection by the debtor, it may move the court to force the debtor to assume or reject the lease on an earlier date.

Different timelines relating to a real property lease apply in a chapter 7 bankruptcy case. Most likely, the Chapter 7 trustee will reject the lease to minimize administrative costs to the bankruptcy estate. However, the trustee may attempt to cure the lease with an eye to assume and assign it to a third party to generate funds for the bankruptcy estate. If the trustee determines that the lease does not provide any value to the bankruptcy case, the trustee may abandon its interest in the lease. Communication with a chapter 7 trustee soon after the trustee is appointed is usually the best practice to determine whether the trustee is willing to abandon the lease and the lessor can repossess the leasehold.

Shopping center landlords are entitled to stronger protections under the Bankruptcy Code to avoid having their lease assigned to an unfavorable tenant. First, the assignee must be at least as financially sound as the debtor at the time the lease was originally signed. Second, the assignee must demonstrate that the percentage rent due will not decline substantially. Next, the assignment may not disrupt the tenant mix in the shopping center. Finally, the assignment may not violate any location, use, radius or exclusivity provision of the lease, or of any other leases, at the shopping center.

A bankruptcy filing by a tenant may significantly affect the lease. Therefore, monitoring the previously referenced deadlines in the event of a tenant bankruptcy filing is extremely important. Additionally, retaining bankruptcy counsel well-versed in the complexities facing a landlord with a bankrupt tenant is a good idea and will help the landlord navigate other potential pitfalls resulting from the bankruptcy filing.

This article first appeared in Inside Counsel on July 28, 2015.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Reinhart Boerner Van Deuren s.c.
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Reinhart Boerner Van Deuren s.c.
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions