Advertising Material

Advertising Material


The First Three Steps a Commercial Landlord Should Take if a Tenant Files Bankruptcy

October 20, 2020

By
Amelia Martin Adams
Attorney, Stoll Keenon Ogden PLLC
(859) 231-3022
amelia.adams@skofirm.com

The COVID-19 pandemic has caused shifts across every channel of the American economy. Nearly overnight, in-office work transitioned to teleworking, and consumers increasingly took to the internet for non-essential purchases. Stores and restaurants quickly had to find new ways to meet customers’ needs or risk closure. Behind the scenes of those difficult choices were commercial landlords who faced an unprecedented wave of missed lease payments. In a National Association of Realtors® study released in July 2020, only 19% of property managers and 36% of individual landlords reported receiving all rent payments on time.[1] Facing those bleak statistics, bankruptcy likely has crossed the mind of many business owners in recent months.

Although a tenant saying, “our company filed for bankruptcy,” is not something that a landlord ever wants to hear, landlords can mitigate the onslaught of stress that comes with a bankruptcy notice by familiarizing themselves with the bankruptcy process before a tenant seeks bankruptcy relief. The United States Bankruptcy Code[2] (“Code”) specifically addresses the treatment of nonresidential (commercial) real property leases in bankruptcy cases, including statutory protections for tenants and timetables upon which landlords may rely. This article discusses the first three steps that a commercial landlord should take upon receiving notice of a tenant’s bankruptcy filing.[3]

Step One: Respect the Automatic Stay. When a landlord receives notice of a tenant’s bankruptcy, the first step should be to immediately cease all efforts to collect debts from the tenant that arose prior to the date upon which the tenant filed its bankruptcy petition (the “Petition Date”). The “automatic stay” is one of the strongest protections that the Code provides a debtor, and, from the moment a petition is filed, it prohibits all acts to collect prepetition debts, including eviction proceedings and terminating a lease before its natural end, with limited exceptions.[4] One notable exception is that the stay does not apply to a landlord’s actions to obtain possession of the leased premises under a commercial lease that terminated by its own terms prior to the Petition Date or during the bankruptcy.[5]

Step Two: Calendar the Deadlines. The landlord’s second step should be to calculate and calendar the critical milestones in the bankruptcy case that will impact commercial leases. In the business context, the tenant will usually be in a “chapter 7” or “chapter 11” case, named for the chapter of the Code that primarily governs the case. In a chapter 7 case, a trustee is appointed to wind down the debtor’s operations, liquidate its assets, and distribute proceeds to creditors in the priority set by the Code. In contrast, in a chapter 11, the debtor becomes a debtor in possession (“DIP”) upon filing its petition, meaning that the debtor retains control of its operations and assets unless a trustee is appointed, which seldom occurs. The typical goal of a chapter 11 is for the debtor to obtain the Bankruptcy Court’s confirmation of a plan to reorganize its assets and pay creditors over time.

A chapter 7 trustee or chapter 11 DIP/tenant must timely perform all obligations under commercial leases during bankruptcy, with few exceptions.[6] However, for cause, the Court may extend the time for performing any postpetition obligation arising within 60 days of the bankruptcy filing, but not beyond those 60 days.[7] If rent goes unpaid during the case, the landlord’s claim for that rent may qualify for higher-priority “administrative expense” status.[8]

Commercial tenants have three options for addressing their leases in bankruptcy: (1) assume the lease and continue satisfying all obligations; (2) assume the lease and assign it to a third-party; or (3) reject the lease and surrender the premises.[9] Unless a trustee or DIP/tenant assumes a commercial lease by the earlier of 120 days from the date the Court enters the bankruptcy “order for relief” or, in a chapter 11 case, the date the Court enters an order confirming a plan, the lease is deemed rejected.[10] For cause, the Court may extend that period once for 90 days, but further extensions may be granted only upon the landlord’s prior written consent.[11] 

Step Three: Calculate the Prepetition Claim and Gather Supporting Documents. Before a lease can be assumed, the trustee or DIP/tenant must cure most defaults and provide adequate assurance of future performance under the lease.[12] For that reason, the landlord’s third step upon receiving a tenant’s bankruptcy notice is to determine the amount of its prepetition claim against the tenant and gather supporting documents. Doing so at the beginning of the case will ensure that the landlord is prepared when the Court sets a deadline for filing a proof of claim and when the trustee or DIP/tenant declares the amount it asserts must be paid to cure prepetition lease defaults.

By acquainting themselves with the bankruptcy process and preparing to take the three steps discussed above, landlords can alleviate the uncertainty that accompanies a tenant’s bankruptcy filing. Because bankruptcy cases–especially chapter 11 cases–can move very quickly in the beginning, commercial landlords would also be wise to consult an experienced attorney at the first sign of a tenant’s financial distress and develop a plan to follow if the tenant files bankruptcy.

In a future article, the author will discuss the treatment of residential real property leases in bankruptcy. Stay tuned for that information.

****

Stoll Keenon Ogden PLLC (SKO) understands that these are trying times for our clients and our country. Our firm operations have continued uninterrupted and our attorneys are equipped to serve as we always have – for more than 120 years.

Our firm’s Bankruptcy & Financial Restructuring practice counsels clients in all aspects of troubled credit situations, in and out of the bankruptcy courts and foreclosure lawsuits. Please contact them for outstanding legal advice for all types of insolvency situations.

Please also be sure to consult the Stoll Keenon Ogden’s Coronavirus Resource webpage for additional articles and information related to the latest information on new laws and directives enacted by federal, state and local governments in response to the Coronavirus pandemic.

[1] Nat. Assoc. of Realtors®, Strong Majority of Realtors® Say Market is in Recovery Phase of Pandemic as Buyers Return, https://www.nar.realtor/newsroom/strong-majority-of-realtors-say-market-is-in-recovery-phase-of-pandemic-as-buyers-return (last visited Oct. 6, 2020).

[2] 11 U.S.C. §§ 101, et seq.

[3] This article offers considerations for a landlord if its commercial tenant becomes a debtor in bankruptcy. Conversely, when the landlord is the debtor, the Code provides protections for the tenant’s interest in the leased property if the landlord rejects the lease. See 11 U.S.C. § 365(h).

[4] 11 U.S.C. § 362(a).

[5] 11 U.S.C. § 362(b)(10).

[6] 11 U.S.C. § 364(d)(3).

[7] 11 U.S.C. § 365(d)(3).

[8] 11 U.S.C. §§ 503(b), 507(a)(2).

[9] 11 U.S.C. § 365(a), (f).

[10] 11 U.S.C. § 365(d)(4)(A).

[11] 11 U.S.C. § 365(d)(4)(B).

[12] 11 U.S.C. § 365(b)(1).