ALP: Tenant Bankruptcy & Commercial Landlords
Question
My retail tenant recently filed bankruptcy. What are my rights as a commercial landlord? How does the filing affect my rights under the lease?
Answer
A tenant bankruptcy filing immediately and automatically prohibits a landlord from taking any action against the tenant or its property, including sending default notices, filing or continuing an eviction action, collecting a judgment, demanding the payment of delinquent rent, or terminating the lease (even if the lease provides that the landlord may terminate if the tenant files bankruptcy) without first obtaining relief from the bankruptcy court. The tenant is, however, obligated to pay rent first coming due after the bankruptcy filing but the landlord must be prepared to enforce this right in the bankruptcy court.
The tenant has three options for dealing with the lease in the bankruptcy case: (1) assume the lease, (2) assume and assign the lease, or (3) reject the lease. If the tenant elects to assume the lease, it must cure all defaults under the lease and the lease will otherwise continue in accordance with its terms. If the tenant elects to assume and assign the lease, the tenant must cure all defaults and the assignee must demonstrate the ability to perform all future obligations under the lease. Generally, the tenant may assign the lease notwithstanding any assignment prohibitions in the lease. If the lease is assigned, the tenant will be relieved of all future obligations under the lease and the assignee will be the new tenant under the lease. If the lease is rejected, all obligations of the tenant will cease, the landlord may retake the space, and the landlord may file a claim for damages.
A tenant bankruptcy filing does not render a landlord helpless. Rather, the landlord must work within the framework of the bankruptcy laws in exercising its rights and remedies. But because bankrupt tenants are often permitted to disregard valid lease provisions absent an objection from the landlord, landlords should consult with experienced retail bankruptcy counsel to ensure their rights are enforced in the bankruptcy case.
