Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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LEGAL BRIEFS Bankruptcy for Landlords Do you know what to do when your tenant files? You're the owner of a commercial real estate property. One of your tenants is experiencing financial difficulty, falls behind in paying its rent, and then files for bankruptcy. The following questions and answers cover what you can and should do to protect your interests. A Tenant Files A bankruptcy case begins by the f ling of a petition for relief in the bankruptcy court. T is action creates a bankruptcy estate consisting of all the tenant's — now a debtor — legal and equitable interests in property. Lease clauses providing for lease termination if the tenant fles for bankruptcy are unenforceable in bankruptcy. Tus, a tenant/debtor's interest under an unexpired commercial lease is property of the debtor's bankruptcy estate. An automatic stay occurs the moment the petition for relief is fled, halting all creditor eforts to collect any claims that arose before the beginning of the debtor's bankruptcy case. Te automatic stay is strictly enforced. Creditors who violate the stay can be found liable for damages, the debtors' attorneys' fees, and, in some cases, for punitive or treble damages. Thus, as a creditor, the landlord must immediately cease all collection or eviction eforts upon learning of the tenant's bankruptcy. Once the lease becomes property of the tenant's bankruptcy estate, any actions to 18 January | February | 2013 enforce the landlord's rights under the lease must be fled in the bankruptcy court. How will you be notified of your tenant's bankruptcy? Because you have an interest in the property that is subject to the lease, bankruptcy law requires that you be given notice of the bankruptcy and of any actions in the bankruptcy case that could afect your interest. Ofcial notice of the bankruptcy will be made via a "Notice of Commencement" issued by the bankruptcy court. You may, however, receive notice of the bankruptcy by other means, such as a news report; an e-mail, phone call, or letter from the debtor or its attorney; or receipt of pleadings fled in the bankruptcy case. How long does the trustee have to decide what to do with the lease? Te Bankruptcy Code grants the trustee (or the debtor in possession in cases under Chapter 11 of the Bankruptcy Code) 120 days to review the lease and determine if it is valuable or burdensome to the estate. Tis deadline can be extended for an additional 90 days if the trustee demonstrates cause for an extension and the extension is granted before the initial 120-day period expires. No further deadline extensions can be granted without landlord consent. Additionally, the Bankruptcy Code requires the timely performance of all debtor obligations under any unexpired lease until the lease is assumed or rejected. The bankruptcy court may extend the performance time of any obligations that arise within 60 days if the trustee establishes cause, but the time period cannot be extended beyond this 60-day period. Tus, the landlord should generally anticipate receiving timely payment of rent that comes due afer the commencement of the debtor's bankruptcy case. Steven Errico/Getty Images y by Michael Zaverton Commercial Investment Real Estate