Bankruptcy of a Commercial Tenant
When a commercial tenant files for bankruptcy, a landlord can easily feel lost in a minefield of bankruptcy court orders and notices, dealing with post-petition financing, claim deadlines, and creditor meetings. Although voluminous, all these legal documents don't seem to address the big three questions for a commercial real property lessor:
Am I going to get paid all obligations due under the lease?
If so, when am I going to get paid?
When will I be able to re-lease the space?
Answers to these questions will depend upon how well you maneuver through the minefield of the debtor/tenant's bankruptcy case.
Debtor/Tenant's Obligations Due Under the Lease
Bankruptcy law provides that a debtor/tenant is required to "timely" perform all obligations arising under any unexpired non-residential real property lease. Thus, a debtor/tenant must pay, when due, all post-petition rents, maintenance charges, insurance, and real property tax obligations that are specified in the lease - post-petition being the operative word.
Did you know that the debtor/tenant may not have to pay the current month's rent?
Whether the debtor/tenant must pay the current month's rent depends on when the bankruptcy petition was filed and when the rent is due under the terms of the lease. If the bankruptcy petition is filed before the rent is due, rent incurred from the bankruptcy petition filing until the end of the month is not due immediately. For example, if the debtor/tenant's petition is filed on the 5th of the month and the commercial lease states that rent will be paid on the 1st of the month, that monthly payment may be deferred by the debtor/tenant until a later point in the case. The first rental payment that must be made is for the following month.
Debtor/Tenant Can Extend Time to Assume or Reject a Commercial Lease
Bankruptcy law provides a debtor/tenant 60 days to decide whether to assume or reject any unexpired commercial real property lease. If the lease is not assumed within 60 days, the lease is automatically deemed rejected.
Did you know that the debtor/tenant can seek an extension of this 60-day period?
Typically, the debtor/tenant will seek an extension until the confirmation of the chapter 11 reorganization plan. Courts generally allow extensions, but condition the extension on the debtor/tenant's agreement to keep the post-petition obligations current. So, it is critical to closely monitor the reorganization process and work closely with the debtor/tenant's counsel.
All Obligations Must Be Cured to Assume the Lease
If the debtor/tenant does assume the lease, all defaults owed must be cured. This means that all post-petition obligations due under the lease, such as rent, real estate taxes, and attorney fees must be brought current before assumption.
Did you know that if the debtor/tenant rejects the lease, you can file a claim for damages incurred?
If the debtor/tenant rejects the lease, the landlord can file a claim for rejection damages. Often, debtor/tenants will file a rejection procedures order with the court that provides that all rejection damages must be filed within 30 days. It is essential for a landlord to be vigilant regarding all papers filed by the debtor/tenant during this period so rights are not lost.
The first 60 days of a debtor/tenant's bankruptcy are vital for a commercial landlord. It is imperative to ascertain your rights under the lease and Bankruptcy law. Seeking effective bankruptcy counsel as soon as the debtor/tenant files can help you steer through the bankruptcy minefield and protect your rights.
A residential tenant files a Ch. 13 bankruptcy, and rejects the lease in her petition. Landlord obtains an Order Vacating Stay to permit eviction. Tenant then moves out of the apartment owing $1,300 in pre-petition rent, and $2,000 in post-petition rent. Landlord applies the security deposit to pre-petition rent, leaving the post-petition rent unpaid. Would the filing of a collection complaint in state court against the tenant to collect the $2,000 post-petition rent be a violation of the automatic stay?
Thank you for your question in response to the post I wrote for the In re Hawk decision. Unfortunately, your question is very specific and I am not permitted to provide legal advice over the internet.
That being said, I can provide you some general reference to your question.
First, the In re Hawk decision that you responded to is inapplicable to your question because the decision dealt with a condominium association lien governed by Section 523 of the Bankruptcy Code. A lien is a secured claim, whereas a lease is not. The lease that you referred to is governed by Section 365 of the Bankruptcy Code, which concerns unexpired leases and executory contracts.
Second, I would suggest that your review the Order Vacating Stay to Permit Eviction. Generally, you need to seek stay relief if you pursue any property of the estate. Since the security deposit is most likely property of the estate pursuant to Bankruptcy Code Section 541, any exactment against property of the estate normally requires approval of the court.
Third, in a lease context, Bankruptcy Code Section 365 provides that pre-petition arrears are treated as a pre-petition claim. Post-petition arrears, until the debtor rejects the lease, is normally an administrative claim governed by Bankruptcy Code Section 503. If rejected, courts treat the lease as if had been breached immediately before the date of the filing and the damages for lease termination will be treated as an unsecured pre-petition claim pursuant to Bankruptcy Code section 502. A landlord's lease termination damages are provided for in Bankruptcy Code Section 502(b)(6).
Questions regarding a landlord's rights under a lease are very fact specific and can be tricky. However, proper analysis of the facts and case law can guide a landlord through even the thickest of these issues.
Please feel free to contact me directly if you have any additional questions at (609) 219-7458.
We have a signed lease with our landlord
thet has a 5 day grace period after which there will be a 45 dollar late charge, We share utilities with 4 other tenants. We moved in on 10-3-05 and gave him a 100 deposit for utilities that he asked for, he sent us a bill for our share of 33.00 on the day we moved in,
we overlooked the bill and paid him on th2 20th of that month. The bill was due to the town by the 15th and now he wants a 45.00 late charge from us and is suing us. no were on the lease does it say about a late fee for utilities. Are we wrong here?
Hello George:
I am responding to your Nov. 23, 2005 web-post
question listed below.
Your question asks if a residential landlord can
seek late fees for late paymnet of utility bills.
Although as an attorney in New Jersey I cannot
give specific legal advice over the web, generally,
residential leases in New Jersey are governed by
the writing - the lease. If a lease provided for
a late charge if payment is not made then the
landlord may be able to seek such a late charge.
Unless a lease provides that a tenant's security
deposit can be used and the late charge not
assessed, then a landlord may have argument to
charge for that amount - the late charge. For
example, a lease may provide that a late charge
may be assessed for late payments. The landlord
could have an argument that utilities are considered payments.
To provide you a better view of your legal
rights, please feel free to give me a call and we
can make an appointment to review the lease and
your legal rights. There is a $250.00 consulting
fee for this service, which is required at the time
of the consult. My phone number is 609-219-7458.
Also, I would be interested in seeing the complaint
filed by the landlord as you said he is suing you for the $45.00. Please note that it is very important to
file an answer to any complaint (suit) filed against
you. In New Jersey, a defendant generally has 35 days
from being served with a compliant to file an answer
or make any counterclaims.
Again, please feel free to give me a call and we can make an appointment to discuss your legal rights.
Regards,
Tom Onder
If someone has a commercial lease for three years in New Jersey. The second year the business fails. The tenant writes the landlord to let her know due to great financial hardship we must terminate the lease. Landlord states tenant still responsible, so tenant continues to pay rent. Landlord told tenant she will not find new tenant; tenant is responsible for lease. Tenant puts up sign to rent space and has had three inquiries- without success. Tenant also told by landlord they must continue paying utilities. What are the tenants rights now? The tenant can not continue to pay the lease.
Hello Tammy:
Thank you for contacting me after reading my blog posting.
You raise a number of interesting issues. However, I need some more facts from you. Further, although I cannot provide legal advice over the internet,
I would be happy to meet with you to discuss your issue in more detail.
Please contact me to make an appointment this week for a consultation. I can be reached at (609) 219-7458. (Please note I charge $150 for an initial onsultation.)
Sincerely,
Tom Onder