Posted: March 24, 2020
Nearly all businesses closed under the Governor’s stay in place Order to reduce the spread of the Corona virus. It is self-evident that the revenue stream of those businesses has completely evaporated based on their inability to operate. It will be nearly impossible for businesses, as tenants in their operational facilities, to remain current on their monthly rent and/or common area maintenance payments. Tenants are now discovering that the lease they signed typically requires tenants to continue to make rent payments even in situations where catastrophic events prevent the use and occupancy of their business. Thus, business owners are rightfully asking if there will even be a business to save once the pandemic is over, if they are too far behind on rent payments to ever catch up. Chapter 11 Bankruptcy provides a mechanism to allow tenants to attempt to restructure the arrears due and owing to landlords.
Under the Bankruptcy Code, a Chapter 11 debtor may assume or reject an executory or unexpired contract within two hundred ten (210) days of the filing of the bankruptcy petition. This means that a debtor can choose to assume and perform under an existing contract, or to breach the contract and reject it, within that time frame. In our situation, the tenant has now commenced a Chapter 11, is in arrears with the landlord, and wants to remain in its facility. The Debtor will have to assume the lease in its bankruptcy, which will require it to become current on the lease payments as a condition of assumption. Courts, however, often facilitate agreements between the landlord and the tenant, whereby a reduced cure payment is made, and the remainder of the arrears is treated under the Chapter 11 plan of reorganization. This means that a Debtor may be given the opportunity to pay the arrears over a five year term payout. A real world tip here is that the tenant must maintain a productive positive relationship with its landlord during the default phase, as you will want the best terms you can receive when it comes to negotiating the cure payment in the Bankruptcy case. Finally, it is critical to note that a Bankruptcy case must be filed before a warrant of eviction is served upon the tenant. If the warrant of eviction is properly served, then the lease may be considered properly terminated pre-bankruptcy, and thus there is no contract to assume in the bankruptcy case.
Alternatively, tenants may also find themselves in the situation where landlords have filed for Bankruptcy relief. A Bankruptcy landlord has no ability to terminate the occupancy of a tenant in commercial space, even if the landlord chooses to reject the lease in Bankruptcy. This is, however, expressly subject to the tenant remaining current on its rent payments. The Bankruptcy Code specifically provides that if a Debtor rejects an unexpired lease of real property under which the debtor is a lessor (landlord), the lessee (tenant) may retain its rights under such lease (including rights such as those relating to timing of payment of rent and any right of use, and possession). Thus, even if the debtor landlord rejects the terms of the lease, tenants still maintain their right to use and occupy the property. This is expressly conditioned on the tenant being current on its rent payments and remaining current, otherwise the landlord will be able to successfully reject the lease.
Chapter 11 is a complex legal process, with significant benefits for those in need. It is critical that you consult with an experienced bankruptcy lawyer to go over all of your options and to understand your rights.
For assistance with all Bankruptcy matters, please contact us:
Ken Kirschenbaum, Esq. (516)-747-6700 Ext. 301 or firstname.lastname@example.org
Stacy Spector, Esq. (516)-747-6700 Ext. 304 or email@example.com