As commercial landlords brace for a potential surge in tenants filing bankruptcy, Trenam shareholder and Florida Bar Board Certified business bankruptcy attorney Stephanie Lieb, along with co-author Alexander Zesch, authored an article for Daily Business Review detailing 10 concepts landlords should understand.
“Commercial landlords have likely forayed into Bankruptcy Court more often than they would like in the past year chasing tenants,” Lieb and Zesch wrote. “Understanding the nomenclature is the first step to gaining control over the process.”
The 10 concepts outlined in the article include:
1. Automatic Stay. Bankruptcy filings trigger a stay of nearly all acts against the debtor, including the filing of eviction actions and even a notice of default, which could lead to financial liability if violated.
2. Pre-Petition Rent. Rent that is past due on the date of the bankruptcy filing will be treated differently depending on whether the lease is assumed or rejected.
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.
4. Stub Rent. “Stub rent” refers to the prorated rent amount for the period between the filing and the next rent due date.
5. Proofs of Claim. An official form a landlord files to preserve its demand for the amount owed by the debtor.
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. If no decision is made within 120 days of the bankruptcy filing (unless extended by court order), the lease is deemed rejected, and the debtor must surrender the premises voluntarily to its landlord on a date certain.
7. Rejection Damages. The rejection of a lease by a debtor tenant is a breach of the lease, entitling the landlord to damages, albeit limited by the Bankruptcy Code to one year’s rent plus pre-petition rent in most cases.
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, including providing 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.
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, and the chosen path is then voted on by the creditors.
For the full article, please click here.
