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What Businesses Need to Know About Rental Property and Foreclosures After Filing for Bankruptcy

Posted by John Smith | Feb 02, 2021 | 0 Comments

The economic upheaval caused by the COVID-19 pandemic has many companies turning to bankruptcy to stave off creditor demands. Depending on the type of filing, bankruptcy will either liquidate the company, wiping their financial slate clean (Chapter 7), or permit the company to restructure the repayment of their debt and continue operating (Chapter 11).

But even after filing for bankruptcy, companies may still have specific obligations to landlords concerning the rental property or may be subject to foreclosure by the bank or lender. Here's what businesses should know.

Landlords

When a commercial tenant files for bankruptcy, the automatic stay prevents the landlord (or almost any other creditor) from pursuing collection claims against them. The landlord will have to seek repayment by filing a claim with the bankruptcy court. Regardless, the tenant-debtor still has two significant obligations to the landlord.

First, tenant-debtors must decide within 120 days how they want to handle the lease. They could “assume” the lease, which would commit them to perform their contractual obligations under the lease, including back rent. The tenant could alternatively assume the lease but assign it to a third party, which would make both parties obligated to perform the lease terms.  Finally, the tenant-debtor can reject the lease, which would end the lease and require them to surrender the property to the landlord. The debtor may make a one-time request for a 90-day extension.

Second, tenants must still pay rent after filing for bankruptcy, even though the landlord can no longer pursue rent claims that went unpaid prior to the bankruptcy. However, the debtor may request the court may extend the time for paying its rent obligation. If the court grants the request, the debtor will have a 60-day break from paying rent.

Banks/Secured Lenders

When a company struggles to make its mortgage payments with no relief in sight, filing for bankruptcy is the best option to stave off foreclosure and potentially keep the property.

Upon filing for Chapter 11, the automatic stay temporarily halts foreclosure until the bankruptcy trustee develops a court-approved reorganization plan. The plan may allow the company to catch up on past amounts due or rewrite mortgage terms if the company has regular, sufficient income to execute this plan.

Chapter 7 bankruptcy halts foreclosure temporarily, but as this form of bankruptcy liquidates the business's assets and does not restructure debt, the debtor cannot renegotiate the mortgage terms through the bankruptcy proceeding. In such cases, the creditor may request a court order to lift the automatic stay and proceed with the foreclosure to sell the property and apply the proceeds to the debt owed. 

About the Author

John Smith

Law Offices of Gerald K. Smith and John C. Smith, PLLC, Tucson, ArizonaPartner (Sept 2008 – Present)Smith & Smith focuses primarily on civil and commercial litigation, secured transactions, bankruptcy and corporate reorganization.  In addition to their bankruptcy and commercial litigation practice, John has developed considerable expertise opposing wrongful foreclosure by large banking institutions against homeowners, a persistent problem in Arizona.

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