Minimizing a Potential Disaster: What to Do When Your Tenant Files for Bankruptcy

August 14, 2013

With the events of the recent Great Recession fresh in every business person’s mind, one recurring fear likely still lurks in the minds of commercial rental property owners: what do I do if my tenant files for bankruptcy? The landlord exists in a state of dread, envisioning a space where it receives zero rent from the current tenant, while the landlord is simultaneously handcuffed from leasing the space to a paying tenant. While a bankruptcy filing is a far-from-ideal outcome, either for the tenant business that has filed, or for the landlord whose property it leases, a landlord can protect its investment, and mitigate its losses in terms of rental income, by maintaining a clear knowledge of its situation and the rules regarding bankruptcy.

The landlord’s right to recovery will vary depending on how long the tenant remains. If the tenant continues occupying the property after filing bankruptcy, the rent arising from that period constitutes an administrative claim. Under bankruptcy law, administrative claims have priority, meaning that, if the tenant has any money to pay any creditors, this type of debt gets paid first. If the bankrupt business lacks enough assets to pay its administrative claims, then these creditors each a share proportionate to its fraction of the totality of all administrative claims.

Filing for bankruptcy also triggers an “automatic stay,” which means the landlord must cease all debt collection activity against the tenant, unless it seeks and obtain the approval of the bankruptcy court in advance. This stay does not completely block the landlord, however. The law prevents the landlord from seeking payment from the tenant business itself, but the landlord is permitted to pursue any guarantors under the lease, even during the stay period.

A tenant or bankruptcy trustee may elect to assume the lease, meaning that it agrees to perform all of its obligations under the lease. This situation gives the landlord special permission to pursue collection of back-owed rent, if the tenant was in default when it filed for bankruptcy. Alternately, if the tenant rejects the lease, this gives the landlord the right to go to the bankruptcy court and ask the court to order the tenant off the property. Obtaining such an order can help speed up the process of the tenant’s exiting the property, and expedite the process of the landlord’s placing a new, paying tenant in the space.

The tenant must choose to assume or reject the lease within 60 days. Although a tenant may request an extension on this time, it often makes business sense for the landlord to decline such a request. Having a formal decision regarding whether the tenant is staying or leaving, which is only achieved through the assumption or rejection of the lease, is necessary to give the landlord an idea regarding in which it must re-lease the space.

Hard economic times create difficult choices for all businesses, including both those who are commercial tenants and landlords. If your commercial tenant has encountered hard times and is seeking bankruptcy protection, contact the New Jersey real estate attorneys at Samuel C. Berger, P.C. to obtain quality legal advice about your rights and options. Diligence and knowledge ar keys to minimizing the harm of a tenant bankruptcy, and our real estate attorneys can guide you throughout the process to preserve the income potential of your property.

Reach us online or call (201) 587-1500 or (212) 380-8117 to schedule your free, confidential initial consultation today.

Blog Posts:

Benefits of Immigration Reform to New Jersey’s Economy, New York & New Jersey Immigration Lawyer Blog, July 11, 2013
What to Do With a New Jersey Tenant Who Doesn’t Leave, Even After Eviction, New York & New Jersey Real Estate Lawyer Blog, May 29, 2013
Winding Up and Dissolving a New Jersey Business, New York & New Jersey Business Lawyer Blog, April 11, 2013