Congress passed new, temporary bankruptcy relief measures late last year that impact certain commercial landlords and tenants. Among other things, the new legislation, which was signed into law on Dec. 27, 2020: 1) extends commercial rent forbearance for certain small business tenants experiencing material financial hardship related to the COVID-19 pandemic, 2) lengthens the time period for commercial tenants to assume or reject a commercial lease, and 3) establishes protections for certain commercial deferred rental payment agreements.
Extended Commercial Rent Forbearance
Description of Change: In general, a commercial tenant in bankruptcy must pay its rental obligations as they become due commencing on the date the tenant files for bankruptcy and continuing through such time that the tenant accepts or rejects the lease. The new law permits a commercial tenant experiencing "material financial hardship" due directly or indirectly to COVID-19 to forbear its obligations to pay rent until the earlier of 1) 60 days after the date of the order for relief under the Bankruptcy Code, a period that may be extended for an additional period of 60 days if the bankruptcy court determines that the commercial tenant is continuing to experience such material financial hardship, or 2) the date that the lease is assumed or rejected. Of note, "Material Financial Hardship" is not defined.
Applicability: The new changes to the bankruptcy code are limited to cases involving "small business debtors" under Subchapter V of Chapter 11 of the Bankruptcy Code, which is restricted to commercial debtors having noncontingent, liquidated debts under $7.5 million.
Sunset of Bankruptcy Relief: Dec. 27, 2022.
Effect: This change will afford a tenant who successfully demonstrates to a bankruptcy court that it has experienced a "material financial hardship" due to COVID-19 to forbear its obligation to pay rent under its lease for a longer time than was initially permitted by the bankruptcy code.
Extended Period for Assumption or Rejection of Unexpired Commercial Lease
Description of Change: The new law extends the initial time period for a commercial tenant to assume or reject a lease from 120 days to 210 days. The prior provisions that provide that the bankruptcy court may order further extensions of this time period have not been changed, with the effect that there is an increase of 90 days within which such a lease may be assumed or rejected.
Applicability: Any Chapter 11 debtor.
Sunset of Bankruptcy Relief: Dec. 27, 2022.
Effect: The extension of time to assume or reject a lease will have the effect of giving commercial landlords and tenants more time to discuss whether the lease should be assumed or rejected. Of note, this extension applies to all debtors, not simply those that are experiencing financial hardship due to COVID-19.
Protection for Certain Commercial Deferred Rental Payment Agreements
Description of Change: Under bankruptcy law, certain payments made by a tenant to its landlord within 90 days of the bankruptcy filing are subject to being clawed back into the bankruptcy estate as "preferential payments." Under the new law, a commercial tenant in bankruptcy who makes a "covered rental arrearages" payment will be excluded from preferential treatment in certain situations. A "covered rental arrearages" payment is a rental payment that has been deferred or postponed under a commercial lease based on an amendment to such lease after March 13, 2020.
Applicability: Any Chapter 11 debtor.
Sunset of Bankruptcy Relief: Dec. 27, 2022.
Effect: This change will protect commercial landlords from having deferred rent payments being clawed back into the bankruptcy estate and thereby will encourage commercial landlords and tenants to negotiate rent deferment arrangements to mitigate the impacts of the COVID-19 pandemic.
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