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September 30, 2022

Tips For Commercial Landlords When Tenants File For Bankruptcy

by John Cannizzaro, Ice Miller LLP

The commercial real estate sector is facing mounting headwinds as 2023 approaches. The pandemic has forced many businesses to reassess their real estate needs, and rising interest rates are putting stress on tenants across a variety of industries. Landlords should be prepared to deal with more tenant bankruptcy cases in the coming year.

The following are a just a few of the considerations that landlords should keep in mind when faced with a tenant bankruptcy. These are not intended to address each and every circumstance a landlord may encounter. If you have any specific questions or concerns, you should seek advice from an experienced restructuring attorney.

  1. The automatic stay and its effect on landlord rights.
    When a tenant files bankruptcy, most efforts to collect debts from the tenant are automatically stayed by section 362 of the Bankruptcy Code, including the payment of past due pre-bankruptcy rent obligations under the lease or the setoff of security deposits. The stay is very broad, and violations of the stay could subject a landlord to sanctions. There are exceptions to the automatic stay.
  2. Rent obligations after a tenant bankruptcy.
    Generally, a tenant must pay rent timely from the date of bankruptcy filing until that lease is assumed or rejected, and a landlord’s claim for such rent, if not paid, may take priority over other pre-bankruptcy claims. Courts differ, depending on the jurisdiction, on how to treat rent that comes due between the date a bankruptcy case is filed and the end of that month (commonly referred to as stub rent). Some courts require stub rent to be paid pro rata for the month it was incurred, while others consider the entire obligation a prepetition debt that need not be paid with post-petition rent payment.
  3. Landlord remedies after the bankruptcy case is filed.
    A landlord may seek judicial intervention to compel payment of post-petition rent or force the tenant to assume or reject the lease if the tenant debtor fails to pay rent. A landlord may also seek relief from the automatic stay to exercise its rights under the lease. In either case, the landlord should not take action without court approval, as doing so could violate the automatic stay and result in sanctions.
  4. Security deposits, guaranties, and letters of credit.
    A landlord’s right to offset its damages depends largely on the type of security. Generally, a landlord may not setoff a security deposit against past due rent without first seeking relief from the bankruptcy court.  But a landlord may, in most circumstances, draw on a letter of credit or proceed against a non-debtor guarantor for unpaid obligations under the lease without first seeking court approval.

Ice Miller’s Bankruptcy and Restructuring practice group represents a broad array of clients, including commercial landlords, and can help evaluate what options might be available. Please contact Dan Swetnam, Tyson Crist, or John Cannizzaro with questions. 

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances. Click here to read a longer version of this article with additional considerations.

When a tenant files bankruptcy, most efforts to collect debts from the tenant are automatically stayed by section 362 of the Bankruptcy Code, including the payment of past due pre-bankruptcy rent obligations under the lease or the setoff of security deposits.