Treatment Of Commercial Leases In Bankruptcy

Treatment Of Commercial Leases In Bankruptcy

June 2, 2020 Off By Glespynorson

Businesses can end up in bankruptcy when the going gets tough and the business owner has exhausted all options to avoid bankruptcy. When such businesses operate out of the leased premise, a commercial lease dispute lawyer or a commercial lawyer is the best person to examine the position of the business applying for bankruptcy and how the lease of the business premises impact the proceedings. If you are in the shoes of the landlord of the premises occupied by the business as a tenant, there are multiple issues to be considered and the type of the bankruptcy that has been filed and the nature of your tenant’s business will be prime considerations. In instances where a bankruptcy trustee is already appointed, he may choose to assert an array of rights granted under the lease terms.  The bankruptcy code may also provide a certain leg-room to the tenant.

Before discussing the rights of landlord and remedies available to him under different themes, we need to briefly understand the underlying difference between a liquidation case and a reorganisation case.  In most cases, businesses would file a bankruptcy case taking the reorganization route. But, if a couple or an individual is involved and the debt is within a specified limit, debtors may be able to benefit from the reorganization route. In a bankruptcy case involving reorganization, the landlord may be required to negotiate directly with the debtor and assert his remedies and rights against the bankruptcy. In instances where liquidation provisions are invoked, the landlord may be required to deal with the bankruptcy trustee for the tenant who would focus on maximising the assets of the tenant in favour of the general creditors of the tenant. As a landlord, the provision under the bankruptcy code in your state will be a major determining factor.

In the context of bankruptcy filed by a tenant, there are several questions that will come up for consideration.  In all instances, the primary question before the landlord will be whether the bankrupt will continue to be in the leased property. The landlord’s interest will always gravitate towards getting vacant possession of his property. Engaging the services of a commercial lease dispute lawyer or a commercial lawyer is always helpful in wading through the legal process.

There Are 5 Major Factors That Will Come Up For Consideration:

Before we discuss these factors, it is important to know that if the lease had expired according to terms enshrined in the lease deed prior to the tenant filing the bankruptcy and the lease terminated on that count, none of the protections available to the tenant under the bankruptcy terms will be available to the tenant. By filing an application for automatic stay in the bankruptcy court, the tenant can be evicted.

Let us now turn to the 5 factors to be considered:-

  1. The tenant is interested in staying on and the lease continues to be current. When the tenant is in the process of reorganizing, he can make payment of all eligible dues to the landlord and assure the landlord that all obligations under the lease will be met in future and obtain an approval from the bankruptcy court.
  2. The lease has been in default but the tenant is keen on staying. Once again, if the tenant is going through the process of reorganization, he can clear all dues and adequately assure the landlord of future performance as per the lease terms and get an approval from the relevant bankruptcy court.
  3. A bankruptcy trustee is appointed. The trustee enjoys identical rights as the tenant under the scenarios enshrined above, though he may not be keen in running the tenant’s business for long. But, if there is still some value left in the lease, the trustee may give the landlord a hearing and assign the lease to a third party and transfer payment in exchange to the bankruptcy estate of the tenant. The trustee would also be required to clear defaults if any and obtain adequate assurance from a new tenant about future performance. A limitation of 60 days post-filing of the bankruptcy will apply to this action. A bankruptcy court will also hear potential objections from the landlord with regard to the new tenant.
  4. The 60-day limitation may, however, be extended if the tenant/the bankruptcy trustee files a motion for an extension before expiry of the 60 day period. When such an extension is not sought and approved, the lease would be deemed rejected and cannot be resurrected except with the consent of the landlord.
  5. When the tenant, as well as the trustee, is not interested in retaining the lease, the property is immediately surrendered to the landlord, or the trustee needs to investigate the potential value of the lease, post the period of investigation. In such a situation, the trustee will be required to pay a minimum administrative rent for every day that the trustee has failed to surrender the lease post-filing of the bankruptcy.


Landlords should also know that in most situations traditional collection tools outside the purview of bankruptcy, the statutory lien of the landlord on the personal property of the tenant etc are nearly useless once a bankruptcy case is filed since such lien and privileges get nearly extinguished by the bankruptcy provisions.