Trusted Real Estate, Business and Asset Protection Attorneys

Addressing a commercial lease when a tenant files for bankruptcy

On Behalf of | Nov 16, 2023 | Commercial Real Estate |

Signing a lease with a new tenant at a commercial facility often leads to multiple years of predictable revenue. Commercial leases often last for anywhere from two to five years, although they can sometimes last for even longer than that. They help landlords recoup the investment to purchase the property and to cover the costs associated with maintenance.

Landlords who have invested in the ownership and care of commercial properties count on reliable payments from their tenants. When they don’t receive rent in full and on time, that can quickly lead to financial struggles for the business that owns the property. Occasionally, a business tenant may inform a landlord that they intend to file for bankruptcy. What would a tenant’s bankruptcy mean for the landlord of a commercial property?

The lease may change or end

Commercial leases are a kind of contract that the business filing for bankruptcy will need to address. A lease is an executory contract that has future implications for both the filer and the landlord. The party filing for bankruptcy usually selects one of three options. They can ask to end the lease, often because they need to close the business or reduce how many locations the company has. They can reaffirm the lease, possibly with special terms to help them catch up on missed rental payments. They can also ask to assign the lease to another party.

Landlords do have some rights during negotiations about leases during bankruptcy. While they cannot dictate exactly what happens, they can potentially reject certain suggestions proposed by the commercial tenant. In many cases, reaffirmation or assignment of the lease will be the best outcome. However, ending the lease early can also be beneficial, as the landlord can get a new tenant in as soon as possible.

Depending on the type of bankruptcy and the debts that the business owes, there may sometimes be an attempt to repay past-due rental amounts. Rental debt may be part of the discharge granted by the courts. If landlords want to exclude their debts from the bankruptcy filing, they may need to file special paperwork requesting an adversary proceeding on the matter.

Learning more about the rules for business bankruptcy may benefit commercial landlords whose tenants have fallen behind on rent and then announced an intention to file for bankruptcy. Seeking experienced legal guidance is a good place to start.