When a commercial tenant files for bankruptcy, a landlord can easily feel lost in a minefield of bankruptcy court orders and notices, dealing with post-petition financing, claim deadlines, and creditor meetings. Although voluminous, all these legal documents don’t seem to address the big three questions for a commercial real property lessor:
Am I going to get paid all obligations due under the lease?
If so, when am I going to get paid?
When will I be able to re-lease the space?
Answers to these questions will depend upon how well you maneuver through the minefield of the debtor/tenant’s bankruptcy case.
Debtor/Tenant’s Obligations Due Under the Lease
Bankruptcy law provides that a debtor/tenant is required to “timely” perform all obligations arising under any unexpired non-residential real property lease. Thus, a debtor/tenant must pay, when due, all post-petition rents, maintenance charges, insurance, and real property tax obligations that are specified in the lease – post-petition being the operative word.
Did you know that the debtor/tenant may not have to pay the current month’s rent?
Whether the debtor/tenant must pay the current month’s rent depends on when the bankruptcy petition was filed and when the rent is due under the terms of the lease. If the bankruptcy petition is filed before the rent is due, rent incurred from the bankruptcy petition filing until the end of the month is not due immediately. For example, if the debtor/tenant’s petition is filed on the 5th of the month and the commercial lease states that rent will be paid on the 1st of the month, that monthly payment may be deferred by the debtor/tenant until a later point in the case. The first rental payment that must be made is for the following month.
Debtor/Tenant Can Extend Time to Assume or Reject a Commercial Lease
Bankruptcy law provides a debtor/tenant 60 days to decide whether to assume or reject any unexpired commercial real property lease. If the lease is not assumed within 60 days, the lease is automatically deemed rejected.
Did you know that the debtor/tenant can seek an extension of this 60-day period?
Typically, the debtor/tenant will seek an extension until the confirmation of the chapter 11 reorganization plan. Courts generally allow extensions, but condition the extension on the debtor/tenant’s agreement to keep the post-petition obligations current. So, it is critical to closely monitor the reorganization process and work closely with the debtor/tenant’s counsel.
All Obligations Must Be Cured to Assume the Lease
If the debtor/tenant does assume the lease, all defaults owed must be cured. This means that all post-petition obligations due under the lease, such as rent, real estate taxes, and attorney fees must be brought current before assumption.
Did you know that if the debtor/tenant rejects the lease, you can file a claim for damages incurred?
If the debtor/tenant rejects the lease, the landlord can file a claim for rejection damages. Often, debtor/tenants will file a rejection procedures order with the court that provides that all rejection damages must be filed within 30 days. It is essential for a landlord to be vigilant regarding all papers filed by the debtor/tenant during this period so rights are not lost.
The first 60 days of a debtor/tenant’s bankruptcy are vital for a commercial landlord. It is imperative to ascertain your rights under the lease and Bankruptcy law. Seeking effective bankruptcy counsel as soon as the debtor/tenant files can help you steer through the bankruptcy minefield and protect your rights.