What Do I Do If One of My Commercial Tenants Declares Chapter 11?

If you own commercial real estate in New York, and one of your tenants just declared Chapter 11 bankruptcy, you need to know your rights and responsibilities.

When Commercial Tenants Go Bankrupt

No one runs a business expecting it to fail. Your tenants signed their leases fully believing that they would have no trouble paying your rent. But things can happen — from pandemics, to recessions, to sudden illnesses. If you have been notified that one of your tenants declared Chapter 11, this is what you should expect.

Automatic Stay

Say your tenant was behind on their rent, and you were trying to collect. Under the automatic stay provision under 11U.S.C. Section 362 of the Bankruptcy Code, once a bankruptcy petition is filed you have to immediately stop any attempts at collection. You are now legally prevented from trying to reclaim back rent, ending the lease early, or evicting the tenant for non-payment. And if you have some sort of bankruptcy clause in your lease, such as stating that declaring bankruptcy defaults the lease, be aware that these types of clauses are unenforceable under the Bankruptcy Code

What you can do at this time is to start putting your paperwork together. When was the last time the tenant paid their rent? How far behind are they? How long is remaining on the lease? This is also when you bring on a bankruptcy attorney to make sure you don’t miss any deadlines and to guide you through the maze that is New York bankruptcy proceedings.

Assumption of the Lease

Commercial tenants declaring Chapter 11 bankruptcy aren’t giving up – they are looking for more time to get their finances in order. They still want to reorganize their business, and to do that they will need a physical location to conduct business, whether it is office space or a storefront. Among other things, under 11 U.S.C. Section 365(d)(4) of the Bankruptcy Code, if your tenant wishes to retain in possession under your lease, they will seek permission of the Bankruptcy Court to “assume” the lease. In order to do this, your tenant must catch up on any missed rent payments, and then continue to pay your rent in full, on time, going forward.

The Court will give your tenant four months (120 days) to decide whether to assume the lease or not. In certain cases, under court order, your tenant may be granted an additional 90 days.

However, if your tenant feels they can no longer afford your rental fees, the court may also give them the option of assigning their lease to a third party. With your approval, your old tenant can transfer the lease to another entity, which will accept the current lease as its own and take on the space and its responsibilities. You will need your bankruptcy lawyer to review all offers and documents here.

Modification of the Lease

As previously noted, your tenant is trying to reorganize his business. If you have a strong relationship with your tenant, you and your bankruptcy attorney may wish to look at reworking your tenant’s lease in order to help the reorganization along. You can look at reducing the monthly rent for a period of time and possibly extending the lease’s duration.

Rejection of the Lease

Unfortunately, not all reorganizations work. If your tenant has not been paying rent for the 4-7 months given to assume or reject your lease, the court will judge that the lease is rejected. If your tenant is still determined to reorganize, they will have to move elsewhere to do so. But what will more likely happen is that the court will make a motion to dismiss or convert the case to Chapter 7 (liquidation).

Under 11 U.S.C. Section 365(g), the rejection of an unexpired lease for non-residential real property is deemed to be a breach of the lease which occurred one day before your tenant’s bankruptcy filing. You are entitled to file a multi-tiered claim for payment against the Bankruptcy Estate as follows:

  1. A pre-Bankruptcy claim for any unpaid sums due under the lease prior to your tenant’s bankruptcy filing;
  2. A post-Bankruptcy claim for rent accrued and unpaid subsequent to your tenant’s bankruptcy filing but before the date of rejection;
  3. A rejection damages claim for the balance due under the lease.

To read more about your options as a commercial landlord with a bankrupt tenant, click here – https://www.ny-bankruptcy.com/landlord-tenant-bankruptcy-2

What to Do Next

The moment you feel that one of your tenants may be financially unstable and possibly heading for bankruptcy, call 631-212-1046 and speak to New York bankruptcy attorney Ronald D.Weiss, PC for a free consultation. He can tell you what to lookout for and how to prepare. And if your tenant does declare bankruptcy, Ron and his team can be by your side to protect your rights.