What happens to my business’s commercial lease if I file Chapter 11 bankruptcy?

Business tenants must think about planning to assume their leases because of Bankruptcy Code deadlines. Without question, the decision to assume a lease is far from automatic and should be treated with the utmost care. Commercial tenants in Chapter 11 must decide (within a limited amount of time) whether to retain or terminate their lease. Once the decision to file has been made, a tenant’s action with respect to its lease obligations must be immediate and the analysis for that decision is critical. In Chapter 11, the tenant becomes a debtor-lessee. Rent payments start up again immediately after filing and the debtor-lessee must adhere to all obligations in the lease going forward. Keep in mind that different rules apply for leases of equipment or other personal property, which have their own deadlines.

Dead Leases Cannot Be Resurrected in Chapter 11

A lease that is valid at the time the case commences (the date of the order for relief) generally can be assumed. Dead leases cannot be resurrected in Chapter 11. In general, leases cannot be assumed when they have ended or have already been terminated by the lessor or lessee prior to filing for Chapter 11 bankruptcy, unless the landlord voluntarily agrees. Thus, a debtor must determine if its lease is still live and valid. Filing for bankruptcy can’t “un-ring a bell.” You don’t get to erase an eviction that was granted before the bankruptcy was filed. But you might stall eviction long enough to negotiate with the landlord for new terms.

Does the mere existence of an eviction case against a tenant (pre-petition) necessarily mean the lease is dead? Not necessarily. An eviction case that is still pending when the Chapter 11 starts does not by itself mean that the lease has ended. While a lease that has not yet been terminated can be assumed (including one with an ongoing eviction), it also must be cured. That means any existing default must be fixed. It’s critical that you are able to confirm the exact status of your lease.

Post-petition Rents

Under the bankruptcy code, a tenant in Chapter 11 is obligated to pay post-petition rents to its landlord (on time). The same obligations that would exist without a bankruptcy still apply. A debtor tenant’s first action is to immediately resume making rent payments to the landlord on the postpetition dates specified in the lease agreement. Some landlords require prorated rent from the filing date up through the last day of the month in which the bankruptcy was filed. Rent obligations are ongoing after the commencement of a Chapter 11 case and should be anticipated when making the decision to file. The tenant should be confident that it can afford to pay rent and all other lease obligations once the case begins.

The 120-day Time Frame to Assume the Lease

Debtor-tenants have 120 days from the date that the case starts (commencement of the case) to decide whether to assume their lease (or leases). A court may grant one extension to the 120-day time frame to assume the lease in certain cases where there is good cause. A tenant’s decision to assume its lease means that all lease obligations will be recommitted to by the tenant. Any changes to the terms of the lease will also be assumed. Another condition for a bankruptcy assumption is that any lease defaults need to be cured. The assumption also needs to include adequate assurance of the tenant’s future performance. For instance, if your deposit has already been applied to past-due rent, you may need to establish a new deposit for the landlord. The Court will usually approve over landlord objection, but only if the lease has not already been terminated (dead), all lease defaults have been cured in full right away, the landlord is given extra assurance about the tenant’s future performance, and the business is likely to reorganize.

The lease will be “deemed rejected” if no decision is made by the time the deadline to assume the lease expires. When a lease is rejected, the tenant must surrender the property to the landlord immediately. A landlord’s rejection claim may be dealt with in the tenant’s plan of reorganization.

Curing lease defaults can be a difficult obstacle for debtor-lessees, especially if funds are limited. A debtor-lessee must pay all defaults that accrued before filing, including all lease delinquencies and unpaid rent, as a condition to assume the lease. Any payments made by the debtor-lessee towards a rental default (or other default) must be made at the time that the assumption occurs. Curing a lease default can include unpaid real estate taxes as well as any landlord costs such as for attorney fees. If the lease requires non-financial obligations like repairs or improvements, these may also have to be cured. All the tenant rights come back if the lease is assumed, including renewal options later on, unless the assumption deal makes changes. Filing for bankruptcy is not something you can be punished for, and is not a basis for terminating your lease. Agreements that say bankruptcy is a default - also called ipso facto clauses - are rarely enforced by bankruptcy courts.

Any previous payment delinquencies must be cured very quickly. If not, it may simply be impractical to stay with this landlord and your best bet is to start looking for somewhere else immediately. Leases are often renegotiated in Chapter 11 if the landlord cooperates. Otherwise, the most you may be offered is a short window of time to move out.

It is always best to consult with an experienced bankruptcy attorney. There are some exceptions to what is explained here and many variables to consider.