Commercial Tenant Bankruptcy Considerations

Real Estate Influence
February 18, 2013 — 827 views  
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Commercial bankruptcy is the top most concern of both the retail center managers/owners as well as the landlords in the distressed market today. When a tenant files bankruptcy, the landlords incur huge losses. However, there are legal options available to them to minimize their losses and protect their interest. 

Pre-Assumption/Rejection Time Period

A tenant is legally in an advantageous position after filing a bankruptcy. He gets to retain the unexpired commercial leases as well as other executory contracts. They are enforceable in the tenant’s favor, not against him, so long as the decision to reject or assume the contract is not taken. However, if the tenant remains in possession of the lease till the decision is taken, he has to pay for the privilege. In some cases, the intervening bankruptcy courts adjust the rent to a reasonable value.  

Executory Contracts

A debtor within the context of commercial bankruptcy can either assume or reject an unexpired lease or executory contract under Section 365 of the code. The debtor has therefore the advantage of choosing to assume a valuable contract and reject the burdensome one. Similarly, an unexpired lease can be retained by a bankruptcy tenant. The lease continues through and after reorganization. However, the tenant cannot use the space free of charge. So the tenant is obligated to pay outstanding dues and perform other pending obligations.

Time period set aside for assumption/rejection phase

The time limit for the commercial tenant to decide upon rejection/acceptance of lease has been shortened by the 2005 Bankruptcy amendments code, much to the relief of the landlords. Earlier, they were at the mercy of the tenants who occupied space without paying rent. Under the current law, a tenant is deemed to have rejected the lease within 120 days of filing for bankruptcy. The court may grant a 90 day one-time extension, while the next extension needs the landlord’s consent.     

Procedure Involved In Assumption/Rejection

According to the best practices in commercial bankruptcy, the tenant’s assumption of the lease must be given in writing. Additionally, the landlord and tenant must get in writing all charges and fees, such as late charges, back-rent, and the current rent, as well as changes in the lease terms and agreements. It is also expected that all charges and fees are brought current. The final agreement must get the bankruptcy court’s approval whether under the reorganization plan or through a separate motion. 

Lease Termination Prior to Bankruptcy

It is better to terminate the lease before the tenant files bankruptcy to avoid uncertainty. There are signals and indicators of financial distress that warns you in time. Some of the signals include late rent payments and requests for part payments or installments. You may access the tenant’s creditworthiness from other sources like the tenant’s lender or trade creditors. If you get a hint of your tenant’s financial distress, the best option is to terminate the lease before the tenant files a bankruptcy.

No landlord should hesitate in terminating commercial leases. Termination doesn’t mean eviction. Tenants can occupy the space after eviction on a month-to-month basis. Tenants can be easily evicted after they file bankruptcy, if the lease is already terminated. On the contrary, a leased tenant cannot be evicted easily.

Real Estate Influence