What Happens to a Commercial Lease During a Bankruptcy?

One of the benefits of bankruptcy protection is that there is an automatic stay on most actions against the individuals or organizations An automatic stay is a federal injunction that immediately stops any collections, evictions, repossessions, utility disruptions, or foreclosures.

While an automatic stay remains in place for the duration of the bankruptcy, creditors may request relief from the stay. The bankruptcy court may approve or decline the request. However, if the court does not answer the request in 30 days, the stay is lifted automatically.

When it comes to a commercial lease and how a tenant or landlord may proceed, there are five scenarios:

1. The lease expired or was terminated before filing bankruptcy

2. The lease is current, and the tenant wants to remain

3. The lease is not expired but is in default, and the tenant wants to remain

4. The lease is either current or in default, but the tenant has filed for chapter 7 (liquidation) bankruptcy

5. The tenant or trustee does not wish to retain the lease

The lease expired or was terminated before filing bankruptcy

If a lease expires before the organization goes into bankruptcy protection, the bankruptcy may not protect the tenant. The landlord can file for relief from the automatic stay, and when granted, may proceed with eviction proceedings. The landlord also has the option of giving a new lease to the tenant.

The lease is current, and the tenant wants to remain

Cases where the lease is current and the tenant has filed a chapter 11 (reorganization) bankruptcy are the easiest to deal with. The tenant must provide adequate assurance of future performance. This assurance shows that the tenant will continue to adhere to the lease terms and obtain approval from the bankruptcy court to assume the lease within 60 days of filing for bankruptcy.

The lease is not expired but is in default, and the tenant wants to remain

If the lease is not expired but in default and the tenant wants to stay, the tenant must first cure the default before it can assume the lease. Further, the tenant must commence paying rent as soon as it files into bankruptcy.

The lease is either current or in default, but the tenant has filed for chapter 7 (liquidation) bankruptcy

In chapter 7 bankruptcy, a trustee's primary responsibility is to sell off the assets to maximize payments to creditors. In terms of a business, the business itself may be sold. If a company is sold, then the new owner may be able to take over the lease. Before this can happen, the trustee must cure any defaults, and the new tenant must provide adequate assurance of future performance. This must be completed within 60 days of filing the bankruptcy. The tenant or trustee may request an extension of this deadline. However, if the deadline passes without an extension being granted, the lease is then rejected. The landlord does have the option of resurrecting the lease. Short of an allowance by the landlord, the tenant or trustee have no recourse once the deadline passes.

The tenant or trustee does not wish to retain the lease

If the tenant or the trustee does not wish to remain in the space, the property is surrendered immediately to the landlord. If a trustee cannot surrender the property due to an investigation of the value of the lease, the trustee must pay a daily administrative rent to the landlord. Administrative rent is not meant to be the full amount of the rent, nor is it designed to cure a default. It is a basic cost of maintaining the property for the time the administrative rent is being paid.

Bankruptcy protection gives the individual or the organization a respite from the demands and possible harassment of creditors and the stress related to eviction or foreclosure. While bankruptcy grants certain protections, these protections can be argued and removed if a creditor files for relief from the automatic stay and it is granted by or not acted upon by the court.

Bankruptcy protection also does not mean that a defaulted lease does not have to be cured.A landlord may not recover all the money owed or even any money in some cases. However, the law recognizes that a landlord needs to collect rent to remain in business and keep up with their obligations.In most of the scenarios discussed, the timeframe granted is 60 days before a property is returned to the landlord.