Landlord-Tenant Issues in Business Bankruptcies in South Florida

When a commercial landlord or tenant files for bankruptcy, both parties need to be careful to protect their rights during the bankruptcy process. While protections are afforded to both parties in this scenario, landlords and tenants must be equally proactive in leveraging those protections. In South Florida, engaging an experienced Miami business bankruptcy attorney is the first step in the process—and both parties should be prepared to work with their legal counsel to target a favorable resolution under the circumstances at hand.

When a Commercial Landlord Files for Bankruptcy

When a commercial landlord files for a business bankruptcy under Chapter 11, a threshold issue for both parties is whether the landlord will reject the parties’ lease. Commercial leases qualify as executory contracts under the U.S. Bankruptcy Code; and, as a general rule, Chapter 11 debtors have three options for dealing with executory leases during the reorganization process:

• Assume – One option is to assume the lease. This keeps the lease intact, and both parties remain bound by their existing contractual obligations. In order to assume a commercial lease during a Chapter 11 bankruptcy, a landlord must first cure any outstanding monetary defaults, and then it must provide “adequate assurance” that it will be able to meet its contractual obligations going forward.
• Assume and Assign – A second option is to assume and assign the lease. This involves transferring the landlord’s contractual rights and obligations to a third party—such as an unrelated entity that acquires the leased premises through a Section 363 sale. With an assumption and assignment, the assignee (rather than the landlord) must provide adequate assurance to the tenant.
• Reject – The landlord’s third option is to reject the lease. While Chapter 11 debtors have the right to reject executory contracts during bankruptcy, doing so constitutes a breach of the underlying agreement. While this generally gives the tenant the right to treat the parties’ lease as terminated and vacate the premises, the tenant may also remain in the premises for the remainder of the current lease term.

If a commercial landlord rejects a lease during a business bankruptcy and the tenant chooses to remain in the leased premises, this raises a host of other legal considerations for both parties. While the parties must generally continue to act as though the lease is still in place, the remedies that are available to the tenant in the event of landlord noncompliance are generally limited to offsetting its damages against its rent due. Additionally, while tenants can seek rejection damages if they vacate the premises, tenants cannot seek these damages if they choose to remain.

The fact that tenants are generally restricted to offsetting any damages (other than rejection damages) against their rent due also means that remaining in the premises could lead to difficult and unfavorable circumstances in some cases. For example, if the landlord refuses to make necessary repairs or maintain common areas in accordance with the parties’ lease, the tenant may be forced to deal with deteriorating (and potentially dangerous) property conditions. As a result, informed decision-making is critical, and commercial tenants whose landlords have filed for bankruptcy should work with experienced legal counsel to ensure they make sound decisions in their long-term best interests.

When a Commercial Tenant Files for Bankruptcy

Many of the same considerations come into play when the shoe is on the other foot—though commercial landlords will have some additional important considerations in this scenario as well.  When a commercial tenant files for bankruptcy under Chapter 11, key considerations for the landlord include:

1. The Automatic Stay

Filing for bankruptcy under Chapter 11 triggers an automatic stay on the enforcement of creditor claims. For commercial landlords, this has the effect of precluding eviction (and precluding efforts to collect rent or other amounts due) during the bankruptcy process. While there are exceptions, a commercial landlord seeking to pursue eviction or collection during the bankruptcy process must clearly and affirmatively demonstrate that a relevant exception applies.

2. The Tenant’s Assumption, Assignment or Rejection

Just like landlords, tenants have the option to assume, assume and assign, or reject their leases once they file for bankruptcy under Chapter 11. If a tenant rejects a lease, the tenant must vacate the premises, and the landlord may pursue a claim for damages as warranted. If a tenant assumes a lease, it must cure all defaults and provide adequate assurance; if a tenant assigns a lease, the assignee must provide adequate assurance as well.

3. The Tenant’s Ability to Cure

If a tenant seeks to assume a lease during a Chapter 11 bankruptcy, a key consideration for the landlord is the tenant’s ability to cure. If a landlord does not believe that a tenant can effect a cure in a timely manner, the landlord may challenge that assumption and attempt to force a rejection.

4. The Tenant’s (or Assignee’s) Ability to Provide Adequate Assurance

Likewise, if a landlord is not satisfied with a tenant’s (or assignee’s) assurance of future performance, the landlord may choose to force a rejection in this scenario as well. Importantly, special requirements apply in certain circumstances, including special “adequate assurance” requirements for shopping center leases.

5. Pursuing an Unsecured Claim in the Event of Rejection

Finally, if a tenant rejects a commercial lease during the bankruptcy process, the landlord will generally be treated as an unsecured, non-priority creditor. For landlords who find themselves in this scenario, understanding the implications of their unsecured, non-priority status is important—and this is just one of many areas in which an experienced Miami business bankruptcy attorney can help.

Schedule a Call with a Miami Business Bankruptcy Attorney at Edelboim Lieberman

If you need more information about landlord-tenant issues in business bankruptcies under Chapter 11, we invite you to get in touch. To schedule a call with an experienced Miami business bankruptcy attorney at Edelboim Lieberman, please call 305-768-9909 or tell us how we can help online today.