My commercial tenant just filed for bankruptcy — now what?

The uncertain economy is teaching landlords a hard lesson: Even reliable, long-time tenants can tread water for only so long, and bankruptcy is an inevitable reality for some. A tenant’s bankruptcy filing has repercussions for its lease obligations, so you need to know what to expect and how to protect yourself.

Important deadlines

In a Chapter 7 liquidation, a tenant must assume or reject an unexpired lease within 60 days of filing or within any additional period granted by the bankruptcy court. In a Chapter 11 reorganization, the tenant typically has 120 days, which the court may extend 90 days without landlord consent. Further extensions require your consent.

The tenant must make all payments due under the lease during the decision period. If it doesn’t, you can get permission from the court to seek remedies, including repossession. But the tenant doesn’t have to pay any outstanding rent obligations from before the bankruptcy filing to stay in possession.

Rejection

If the tenant doesn’t make a decision by the applicable deadline, the lease is deemed to be rejected and you regain possession. If the tenant doesn’t surrender the premises, don’t take action to evict or you might be liable for your tenant’s damages, including legal fees and possibly punitive damages. You must instead file a motion with the bankruptcy court.

Similarly, if the tenant proactively decides to reject the lease, it must surrender the premises. The prefiling rent due remains outstanding, and you can file a claim for rejection damages if the lease has at least one year left.

Assumption or assignment

To assume the lease, the tenant must obtain bankruptcy court approval, cure all lease defaults and provide adequate assurance of future performance of the lease. If the tenant wishes to assign the lease, it first must assume the lease and then it can propose an assignee. Bankruptcy courts generally approve assignment, regardless of antiassignment clauses in your lease. You can object if:

• The assignee isn’t as financially sound as the original tenant when the lease began,
• The tenant will alter percentage rent rates,
• The assignee will disrupt your tenant mix, or
• The assignment violates location, use or exclusivity provisions of your lease.

It’s up to the judge to decide whether your objection is reasonable.

Act to protect yourself

Landlords should look for bankruptcy warning signs. Before a tenant’s bankruptcy petition, you can file a complaint and terminate the lease, thereby reclaiming possession and sidestepping the bankruptcy process. But if bankruptcy strikes, take measures to enforce your rights.