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Tips to Minimize Landlord's Exposure When a Commercial Tenant Files Bankruptcy
Landlords often have clues that a tenant is going to be filing for bankruptcy, rental payments are consistently late several months in a row and the tenant falls more than a month behind on the rent. But, it can still be shocking when a landlord receives a legal notice in the mail, instead of a rent check.
Because bankruptcy can add significant expenses and increase the time it takes to remove a delinquent tenant, landlords should not allow tenants to fall far behind on rental payments. Below are some tips on how to address the issues raised by a bankrupt tenant:
- Perform due diligence on the proposed tenant's finances, regardless of whether it is a large corporation.
- Obtain an appropriate deposit from the tenant, regardless of whether it is a large corporation or a single-owner limited liability company.
- Consider reducing the term of the lease based on the tenant's square footage vs. the size of the commercial property, meaning no extended leases that can be easily rejected in a bankruptcy and not subject to payment of the liquidated damages stated in the lease.
- Include a clause that protects the landlord in the event of late or slow rent payments.
- Include a clause to address any future bankruptcy although often times these so-called ipso facto clauses are rejected by bankruptcy courts.
What Happens When You Get Notice of a Tenant's Bankruptcy?
But, even landlords who are vigilant about selecting reliable tenants and enforcing lease provisions may find themselves on the receiving end of a bankruptcy notice.
Most of the time, commercial property owners will receive notice about a tenant's bankruptcy filing from a letter sent by the Bankruptcy Court. This "notice to creditors" gives the court's address, the case number, and several important dates in the case.
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