In recent articles, we have discussed how bankruptcy may prevent or delay an individual’s eviction. In this article, we will look at how a corporate tenant can find relief. If a tenant has fallen behind in their payments due to a decline in income, Chapter 11 may provide a solution. While filing Chapter 11 will not force a landlord to reduce or eliminate rent, it may allow for a delay in the eviction process – and give the tenant time to strategize a practical course of action.
Pre-COVID 19 Pandemic
Some rules have changed in the face of the pandemic, but the following represents the longstanding rules on the books regarding commercial tenants, eviction, and Chapter 11. We will discuss the new rules as they apply to the pandemic below.
In the event of delinquent rent payments, tenants may decide to abandon their lease or consent to their landlord’s notice of eviction. However, if neither of these situations occurs, the landlord is required to file an eviction lawsuit in court to regain possession of the business premises. Once this is done, the commercial tenant can pause the eviction process by filing Chapter 11.
The Bankruptcy Code Section 365 offers the tenant 120 days to assume or reject the current lease. To remain in the property after that point, the tenant will be required to provide a plan that would promptly cure any arrears that occurred pre-petition. The bankruptcy court’s interpretation of “prompt” cure will depend on the unique facts of each case, such as the remaining term of the lease.
If the commercial tenant’s income is not sufficient to maintain the regular lease payment and cure the arrears, Chapter 11 may still provide additional time for negotiation with the landlord. However, if the tenant cannot make up back payments – or agree to a solution with the landlord – the tenant will be required to move or close the business. If closing the business is determined to be the only possible option, the tenant can choose to file a Chapter 11 Plan of Liquidation. Another option may be to convert their Chapter 11 case to Chapter 7, methodically close the business, and take care of their corporate liability under the lease.
New Rules Under the Consolidated Appropriations Act (CAA)
The CAA was enacted in 2021 in response to the ongoing COVID-19 crisis. Among its many provisions, it addressed the needs of corporate tenants and landlords due to financial hardship related to the pandemic. Some of these related amendments to the bankruptcy code include:
* Small business debtors can request additional extensions to their required rent payment deadlines up to 60 days after filing. This provision postpones the payment obligation – it does not forgive rent in arrears or any rent that accrues during the extension period.
* Small business debtors are those with less than $7.5 million in non-contingent, unliquidated debts to third parties.
* Debtors are allowed an additional 90 day period after the original 120 days to assume or reject the lease. This extension provides up to 210 days for the tenant to decide on their course of action.
* These amendments will expire on December 27, 2022, or two years after the enactment of the CAA.
In Conclusion
Small business debtors who are behind in their rent and considering bankruptcy should evaluate their options regarding the traditional bankruptcy provisions and the recent amendments. Understanding how taking these steps may impact their business and future dealings are critical – and that is why having the advice of an experienced bankruptcy attorney can make all the difference.
Richard V. Ellis and his team have provided expert bankruptcy advice and representation in Sarasota for over two decades. Call today for more information on how we can help you navigate the bankruptcy process.
