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New Bankruptcy Code May Provide Way Out of Commercial Leases
In major metropolitan areas, commercial office vacancies have skyrocketed and rents have plummeted. Tenants, required to examine their space needs post-pandemic, are eager to take advantage of the lower rents. A recent addition to the Bankruptcy Code provides these lessees with an opportunity to walk away from above-market leases.
If a small business is a party to a lease that it wants to abandon, the Bankruptcy Code provides the company with the potential to avoid the legal obligations under this lease. After filing for bankruptcy under Chapter 11, the reorganization section, the company may reject (breach) the lease. In return, the landlord/creditor receives a damage claim resulting from the lease rejection payable pro rata with other creditors. So far, so good.
Unfortunately, Chapter 11's high costs and complexities make it difficult for small businesses to successfully reorganize this way. Although the Chapter 11 debtor keeps control of its operations, the company is subject to significant supervision by the bankruptcy court.
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