The recent Great Recession and the wave of bankruptcy filings that followed have presented a lot of challenges for landlords and tenants. Yet, even as the economy continues to recover, there are still many retail chains, such as American Apparel and Radio Shack, turning to bankruptcy courts for relief. As this trend continues, both landlords and tenants need to be aware of the issues involved with a potential lease workout and bankruptcy.
A tenant can file a bankruptcy petition under either Chapter 7 or Chapter 11 of the Bankruptcy Code. Under Chapter 7, the debtor has determined that it cannot continue to conduct business and chooses to liquidate its business. Under Chapter 11, the debtor seeks to reorganize its business and thereby restructure the debt.
- The Automatic Bankruptcy Stay Protects the Tenant Debtor.
Once the debtor files for bankruptcy, an automatic stay immediately arises under Section 362 of the Bankruptcy Code to protect the property of the debtor’s estate. This stay prohibits actions by creditors, landlords, and others to commence any judicial action against the debtor. However, the landlord may obtain possession of property with respect to a commercial lease that has terminated by the terms of the lease either before the commencement of the case or during the bankruptcy case.
- The Tenant Debtor’s Right to Assume, Assign, or Reject the Lease.
Section 365 of the Bankruptcy Code deals with executory contracts and unexpired leases, and the heart of the section allows the tenant debtor to either retain the benefits or reject the lease. The tenant can, subject to court approval, also elect to assign the lease to a third-party. The Bankruptcy Code gives the debtor 120 days to make this decision.
- Landlords in Bankruptcy
Not only has the recent economic downturn significantly impacted retailers, but it has also caused a number of property owners to seek bankruptcy protection. Under Section 365, the landlord also has the right to assume, assign, or reject an unexpired lease.
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This article is not an exhaustive list of all possible options available for dealing with tenants or landlords in bankruptcy. It is important to contact and hire an experienced and competent bankruptcy attorney to guide you through the process to ensure you receive what you are legally entitled. It makes sense to hire a local bankruptcy attorney who has the resources to fight for your future. Contact the Law Firm of Hoskins, Turco, Lloyd & Lloyd for a free consultation to go over all your options and get you on the road to a financial fresh start. Don’t delay. Call 866-460-1990.