What To Do When A Commercial Tenant Files For Chapter 11 Bankruptcy

1) Assess whether the lease has terminated prior to the filing.  A tenant in bankruptcy can only assume an unexpired lease.  If the lease terminated prior to the bankruptcy, the lease is not property of the bankruptcy estate and cannot be assumed or rejected by the tenant.  It is important to note that any provisions of the lease that provide the lease is terminated upon the filing of a bankruptcy are not enforceable.

2) Pay attention to the critical deadlines.  Tenants have 120 days from the date of the bankruptcy filing to assume or reject their nonresidential real property leases. The tenant may seek a 90-day extension of this deadline with the Court. It is important to note that any extensions beyond this additional 90-day period will require the consent of the landlord. If a tenant assumes its lease, the landlord is entitled to a cure of all monetary defaults.  The tenant must also compensate the landlord for any damages caused by a default and provide adequate assurance of future performance. The tenant can also assume and assign the lease to a third party.  If a tenant rejects the lease, the landlord can file a proof of claim of its damages which are subject to a statutory cap under bankruptcy law.

3) Know your rights.  Typically, a tenant must timely pay postpetition rent (unless an initial 60-day relief period is sought) and failure to pay postpetition rent will result in the landlord having administrative claims against the bankruptcy estate for unpaid rent.  If a tenant has already vacated the premises or continues to breach the lease, then the landlord must seek stay relief in the bankruptcy to terminate the lease, or in the alternative, may seek to file a motion to compel the tenant to assume or reject.

*For the sake of clarity, the 60 day relief from paying rent only applies to leases of personal property, not real property.

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