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Common Issues In Commercial Property Bankruptcies
As the commercial real estate market undergoes seismic shifts resulting from the rise of online retailing, the COVID-19 pandemic, the growth in work-from-home options for employees and employers, and the continuing evolution of how we do business as a nation, companies may find themselves in situations where their tenant or their landlord has filed for bankruptcy protection. Questions then quickly arise, such as if and how a landlord may evict a bankrupt tenant, whether a bankrupt tenant may remain as a lessee and continue to occupy the premises, and how to measure damages for a landlord in this situation, both before bankruptcy and going forward post-petition. The Bankruptcy Code and related case law address these points.
Under the Bankruptcy Code, a debtor has the right to elect to assume or reject executory contracts, such as unexpired leases for real property. 11 U.S.C. §365. A debtor with operations in multiple locations may, if approved by the Bankruptcy Court, assume leases for locations where the lease is affordable (in the case of a tenant debtor) or profitable (in the case of a landlord debtor), and where it makes business sense to continue the lease. The debtor may reject leases for those locations where that is not the case.
Commercial Tenant Bankruptcies
Generally, to assume an unexpired lease, the debtor — i.e., a debtor-in-possession (DIP) or Chapter 7 or Chapter 11 Trustee — must cure any default in the lease (such as unpaid rent through the time of lease assumption), or provide adequate assurance that such default will be cured, as well as provide adequate assurance that the tenant will perform its future obligations under the lease. 11 U.S.C. §365(b). Whether "adequate assurance" is provided is determined by the Bankruptcy Court, with guidance on interpreting the broad provisions of the Bankruptcy Code provided mainly by a patchwork of case law.
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