No longer need all that space? Termination of Leases in Bankruptcy
What happens to a lease agreement after filing for bankruptcy? Does it automatically terminate or must the obligations in the agreement be upheld? Or can you cancel or terminate it?
THE AUTOMATIC STAY
Immediately upon the filing of a bankruptcy petition, an “Automatic Stay” goes into effect which prevents creditors such as landlords from commencing eviction proceedings, continuing an eviction proceeding, or collecting past due rent.
In addition to this protection, a debtor may also “assume” or “reject” an unexpired lease with court approval. Under a Chapter 11 or a Chapter 13 bankruptcy proceeding, there is no fixed amount of time in which the debtor must reject a lease on residential real property. It must only come before the confirmation of a reorganization plan. For commercial property, a tenant-debtor has a 120-day period from the date of filing to assume a lease, and may extend that period for an additional 90 days. After the 210 total day period lapses, rejection of the unexpired lease occurs automatically.
CAP IN FUTURE RENT AFTER REJECTION OF LEASE
If the tenant-debtor chooses to reject the lease, the lease is considered breached as of the petition date. The landlord is then entitled to claim limited future rent under the lease. There is a “Landlord’s Cap” that limits the amount the landlord may claim after the rejection of a lease. The landlord’s claim under the cap is limited to the lesser of either (1) 15% of the remaining gross rent or (2) three years’ rent, unless the 15% amount is less than one year’s rent, in which case the claim is limited to one year’s rent. The Ninth Circuit has interpreted the “15% amount” as referring to 15% of the time remaining on the lease, as opposed to 15% of rent remaining under the lease. Excluded from this landlord’s cap are any claims regarding damage to the property, but not claims for routine maintenance.
In summary, when a residential tenant-debtor rejects a lease, the landlord may still have a claim for all rent due prior to filing the petition as well as a capped amount of post-petition rent. However, for commercial real property, the debtor must still satisfy their obligations under the lease, including payment of rent that becomes due after filing the petition.
A landlord-debtor has similar protections as a tenant-debtor. They may also assume or reject a lease. Rejecting the lease discharges all their duties and obligations under the lease. However, the tenant maintains the option of either abandoning the property or continuing to occupy the property, retaining all their rights under the lease unrelated to the landlord’s duties. Any damages that may accrue as a result of the landlord’s nonperformance after rejection of the lease may be deducted from the tenant’s rent payments.
Authors: Kristina Iliopoulos and Brandon Anand