When a tenant files for bankruptcy, landlords often focus on protecting their core lease rights. But what about the letter of credit you required as added security, or the personal guarantee you carefully negotiated? These tools can become valuable assets in a bankruptcy scenario, but only if you understand how to assert your rights under bankruptcy law.
At Strategy Law, our bankruptcy and creditors’ rights lawyers regularly counsel landlords on enforcing their rights beyond the lease. From letters of credit and lease guarantees to shopping center protections and dealing with abandoned property, this guide outlines what landlords need to know after a tenant files for bankruptcy.
Guaranties and Letters of Credit: Are They Protected?
Here’s the good news: Bankruptcy’s automatic stay that protects debtors from collection efforts typically does not apply to third-party guarantors or issuing banks for letters of credit. That means:
- You can usually pursue a guarantor even when the tenant is protected under the bankruptcy stay.
- You may still draw on a letter of credit without violating bankruptcy protections, because the obligation is between you and the bank, not the tenant/debtor.
However, it’s not always that simple.
Exceptions to Watch For:
- Extension of Stay to Non-Debtor Guarantor: In limited circumstances, a guarantor may argue that the debtor’s restructuring requires its financial support, such as funding operations or providing a capital infusion. In such cases, the bankruptcy court may temporarily extend the stay to enjoin your action against the guarantor to avoid disrupting the reorganization process.
- Bank’s Recourse to the Debtor: When one draws on a letter of credit, the issuing bank likely required the debtor to post collateral. To prevent the debtor’s estate from being prematurely depleted, the bankruptcy court may delay the draw for up to 60 days, giving the debtor time to evaluate the impact and reorganize their obligations.
Strategy Tip: A landlord’s rights against guarantors and issuing banks are often stronger than those against a tenant in bankruptcy. However, nuanced court rulings and debtor protections can complicate matters, making legal guidance essential before taking any action.
Extra Protections for Shopping Center Landlords
If your lease is part of a shopping center, you’re in luck; Congress has built in additional protections for landlords like you.
When a tenant wants to assign a lease in a shopping center, the Bankruptcy Code requires:
- Similar financial stability of assignee
- Preservation of tenant mix and balance
- Compliance with restrictive use and exclusivity clauses
- Assurances that percentage rent won’t materially decline
- Continued adherence to all lease terms
These rules help preserve the integrity and economic value of your retail property, ensuring that an assignment does not materially disrupt the ecosystem of tenants.
Example: If your lease prohibits a pizzeria next to your high-end wine bar, a tenant in bankruptcy cannot assign the lease to a pizza chain and override that restriction.
How Strategy Law’s Bankruptcy and Creditors’ Rights Attorneys Can Help
At Strategy Law, our team helps landlords protect their full range of rights in tenant bankruptcy, including:
- Pursuing claims against guarantors and issuing banks
- Challenging lease assignments that violate use restrictions
- Maximizing administrative claims for cleanup and unpaid rent
- Defending against improper stays or objections
- Navigating the claim process efficiently and strategically
Final Thoughts
While tenant bankruptcies are rarely straightforward, landlords who plan ahead and use sound legal strategy can recover more than just unpaid rent. There’s often much more at stake beyond the lease, including shopping center protections, letters of credit, and abandoned personal property.
Need help navigating a tenant bankruptcy?
Connect with the Bankruptcy and Creditors’ Rights attorneys at Strategy Law LLP today to explore your legal options and protect your property investment.
