When a commercial tenant files for bankruptcy, landlords can face serious challenges, from missed rent payments to uncertainty about lease terms and future occupancy. Whether the lease is assumed, assigned, or rejected during the proceedings, the experienced bankruptcy and creditors’ rights attorneys at Strategy Law are here to help landlords understand their rights and protect their interests.

Below, we outline the key considerations every landlord should keep in mind when navigating a tenant bankruptcy.

1. If Your Lease Is Assumed or Assigned

The Bankruptcy Code demands adequate assurance of future performance if a debtor (the tenant) wishes to assume and assign the lease to a third party. For landlords, that means the following:

• If the lease is assumed after default (except for defaults solely due to insolvency or the bankruptcy filing), the debtor must cure all defaults, including pre- and post-petition rent and other damages caused by the tenant’s breach.
  
• If the debtor attempts to assign the lease, you are not required to accept just anyone as a new tenant. The assignee must meet financial and operational standards to ensure it can perform all of the lease obligations.
  
• The new tenant’s use of the premises must comply with existing lease terms. A bookstore can’t suddenly become a nightclub unless the lease permits broad use.
  
• Even if the assumption seems promising, expect negotiations. Tenants or potential assignees often seek lease modifications in exchange for taking over.

2. If Your Lease Is Rejected

You may reclaim the property if the lease is rejected. But what happens to the damages and overdue rent?

• Security deposits: The tenant’s security deposit becomes part of the bankruptcy estate. The landlord becomes a secured creditor for that sum, but  the landlord cannot access it without the court’s approval.
• Administrative claims: As a priority administrative expense, rent that is owed between the date of the bankruptcy filing and the lease rejection is entitled to be paid in full.
  
• Unsecured claims: Damages from lease rejection (i.e., rent due for the remainder of the lease) are treated as unsecured claims, and capped under the Bankruptcy Code at the greater of roughly:
  
  • One year’s worth of rent, or
    
  • 15% of the remaining term of the lease, not to exceed three years. Note there is a split of authority on whether the 15% is measured against the remaining rent or the remaining term on the lease, which can have significant consequences.
    

The landlord may also pursue unpaid “additional rent”, so long as it results from the rejection of the lease, such as:

• Real estate taxes
  
• CAM charges
  
• Utilities
  
• Legal fees
  
• Rent concessions clawbacks (e.g., free rent, improvement allowances)
  

Note: Claims against  third-party guarantors or banks issuing letters of credit may be pursued separately, and without the same limitations applied to debtor claims. Note there is a split of authority on whether the bankruptcy cap limits a landlord’s draw on a letter of credit. 

3. Understanding Your Rent Claim

Rent claims in bankruptcy can be complex:

• If a tenant makes a lump-sum rent prepayment shortly before filing for bankruptcy, the court may require the landlord to return it, as it could be deemed a preferential payment.
• There is less exposure if a non-debtor affiliate, like a parent firm or guarantor, makes the payment to you.
  
• Unless you agree otherwise during negotiations, a landlord is entitled to full payment of all past and future rent if the lease is assumed.
  
• If the landlord is denied payment but holds a security deposit, the landlord may be treated as a secured creditor up to the security deposit amount for the period the tenant continues to occupy your property.
• Unpaid rent during that period may qualify as an administrative expense claim, giving you priority over other unsecured creditors, provided the tenant remains in possession after the claim is filed.

Unfortunate Reality in Tenant Bankruptcies: Don’t count on full recovery from an unsecured claim. It’s common for such claims to receive only pennies on the dollar.

4. Protecting Your Financial Interests

At Strategy Law, our Bankruptcy and Creditors’ Rights attorneys help commercial landlords to:

• Respond to tenant bankruptcy filings
  
• Navigate lease assumption/assignment or rejection processes
  
• Assert claims properly and on time
  
• Negotiate lease modifications or assignments
  
• Secure court orders to access security deposits or letters of credit
  
• Protect rights against guarantors or letter of credit issuers

Final Thoughts

Landlords encounter a complex web of legal, financial, and procedural issues when a tenant declares bankruptcy. You need legal counsel well-versed in the complexities of the Bankruptcy Code; professionals who know how to properly protect your rights, whether your lease is assumed, rejected, or renegotiated.

Facing tenant bankruptcy?
Connect with the Bankruptcy and Creditors’ Rights attorneys at Strategy Law LLP today and let us help you protect your rental income, property value, and long-term interests.