Bankruptcy Risks to Landlord When Tenant Files a Bankruptcy Case

Lexis Practice Advisor

This practice note discusses the risks to the landlord when a tenant files for bankruptcy and the steps a landlord can take to protect itself following a tenant’s bankruptcy filing.

Once a tenant enters a Chapter 11 bankruptcy case and becomes a debtor-in-possession, it has the option of assuming (and perhaps assigning) or rejecting its unexpired lease. If a lease is assumed, the lease continues in full force and effect, and any defaults by the debtor must be cured and damages compensated. If the debtor tenant also assigns the lease, the landlord would acquire a new tenant. Where an unexpired lease is deemed rejected, the Bankruptcy Code provides that the debtor tenant shall surrender the premises and the landlord shall have a claim for rejection and other damages, as well as a possible claim for post-petition rent. In negotiating the terms of a lease, a landlord should therefore try to maximize the debtor tenant’s obligations to cure any rental payment defaults under an assumption (and to compensate for any other damages). The landlord should also try to maximize its claim under a rejection.

This practice note addresses these issues and landlord risks in a tenant bankruptcy as follows:

  • Lease Status and Risk of Recharacterization
  • Maximizing Debtor’s Obligation to Cure If Lease Is Assumed
  • Maximizing the Claim Amount If the Debtor Tenant Rejects the Lease
  • Maximizing Landlord Recovery for Debtor’s Obligations Arising after the Bankruptcy Case Begins

To read the full practice note, please click here.

“Bankruptcy Risks to Landlord When Tenant Files a Bankruptcy Case,” by Ira L. Herman was published as a 2020 Lexis Practice Advisor® Practice Note. Reprinted with permission.