Bankruptcy can be a frightening and intimidating situation for a commercial landlord to find itself in, particularly when a landlord is experiencing the process for the first time.
Bankruptcy law has a language of its own, making it challenging to navigate the process without help from trusted advisors who are familiar with the bankruptcy process.
Commercial landlords should understand these ten concepts, as a start.
1. Automatic Stay. A bankruptcy filing triggers a stay of nearly all acts against the debtor, including the filing of eviction actions and even a notice of default. Violators of the automatic stay can be held liable for damages to the debtor, including punitive damages if the violation is deemed willful.
2. Pre-Petition Rent. The date of the bankruptcy filing is an important cleavage point for landlords of the debtor because any rent that is past due on this date is treated differently from rent that accrues after this date. This amount will be treated differently depending on whether the lease is assumed or
rejected, discussed below.
3. Post-Petition Rent. If the tenant remains in the leased premises during the bankruptcy, the Bankruptcy Code requires the debtor to stay current on rent that becomes due after the petition
is filed, at least until the lease is assumed or rejected. Post-petition rent is entitled to be paid in a higher priority than other claims. So, if the debtor is not making payments, the landlord can file an
administrative expense claim for the post-petition rent.
4. Stub Rent. Odds are that the filing date for the bankruptcy case is not the same day as rent comes due. In fact, some tenants wait to file their bankruptcy case until mid-month by design. “Stub
rent” refers to the prorated amount for the period between the filing and the next rent due date. Depending on the jurisdiction, landlords can seek an administrative claim for this amount as well.
5. Proofs of Claim. Generally, a landlord files a proof of claim to preserve its demand for the amount owed by the debtor. A proof of claim is an official form and the landlord must attach the applicable lease and other support demonstrating how it calculated the amount due. The debtor can review the claim filed and object to it if the debtor does not agree.
6. Rejection of the Lease. If the debtor-commercial tenant’s lease is unexpired, the debtor will have to decide whether to assume or reject the lease. Some tenants with unprofitable locations will make this election immediately or soon after the bankruptcy filing. If no election is made within 120 days of the bankruptcy filing (unless extended by court order), the lease is deemed rejected. Rejection of the lease means the debtor must surrender the premises voluntarily to its landlord on a date certain. At that point the landlord can enter the premises, rekey it as needed, remove façade signage and proceed to release it. Assumption of the lease means that the debtor will be required to cure all prepetition defaults and remain current on the lease during the entire bankruptcy case. Provided that the tenant remains current, they will be entitled to remain in the space and keep the lease.
7. Rejection Damages. The rejection of a lease by a debtor tenant is treated as a breach of the lease, entitling the landlord to damages; however, the Bankruptcy Code limits damages to one year’s rent plus prepetition rent in most cases. Rejection damages claims generally include all pre-petition rent, any accrued but unbilled charges (like year-end adjustments), and one year of rent remaining on the lease term. Landlords should consider their security deposits or letters of credit in preparing these claims.
8. Assumption and Adequate Assurance of Future Performance. The tenant debtor can seek to assume the lease for itself, if the goal of the bankruptcy is a reorganization, or to assign the lease, if a sale is contemplated. In either case, the tenant or assignee must promptly “cure” all obligations under the lease (including past-due rent, pre- and post-bankruptcy filing as well as any non-monetary defaults) in order to assume the lease. Further, the debtor or the buyer, must also provide “adequate assurance of future performance” to the landlord showing debtor/buyer can perform under the lease going forward. Landlords can object to an assumption of the lease, as well as object to the debtor’s
proposed cure figures.
9. Shopping Centers. Tenant debtors seeking to assume shopping center leases have a heightened burden. Here a debtor must provide adequate assurance of the source of future payments to the
landlord, that percentage rent (like additional rent based on the tenant’s sales) will not decline substantially, and that the assumption will not disrupt the landlord’s tenant mix or violate exclusive use/restrictive use type agreements. In case of an assignment, the proposed new tenant’s financial condition and performance must be similar to that of the tenant when it originally signed the lease.
10. Chapter 11 Plans. A debtor enters Chapter 11 generally to (i) reorganize its business, (ii) sell the business as a whole, or (iii) sell the business in pieces. The debtor’s selection of path is memorialized in a Chapter 11 plan, which is then voted on by the creditors. Often in retail cases, debtors choose to sell their operations to a buyer who then selects whether to assume or reject a lease with a landlord.
While this list is not meant to cover every situation that a commercial landlord might have to deal with in connection with a tenant’s bankruptcy, it is a strong starting point for landlords to begin to familiarize themselves with the process.
Trenam Law has extensive experience advising commercial landlords in bankruptcies and is ready to assist your team.
