The COVID-19 pandemic and resultant economic crisis have forced numerous commercial tenants to file for bankruptcy. Landlords, even those not yet confronted with this situation, should develop a firm understanding of a landlord's rights and limitations under the Bankruptcy Code and learn the protections the Code offers tenants. Although the situation is challenging, if a tenant goes bankrupt, there are ways landlords can mitigate risks and damages–if they act quickly.
Below are three actions every commercial landlord should take when a tenant with an unexpired lease files for bankruptcy.
1. Respect the Automatic Stay
The tenant's bankruptcy filing immediately triggers an automatic stay.
The automatic stay is a powerful injunction prohibiting most creditors, including landlords, from bringing or continuing any action to recover amounts owed from the debtor. The moment the automatic stay goes into effect, the landlord may not initiate or continue a lawsuit against the debtor-tenant, send a notice of default, or even contact them to demand back rent. If a landlord violates the automatic stay, the debtor-tenant might be entitled to recover damages from the landlord, including attorney's fees.
However, note that a landlord may file a motion requesting the bankruptcy court to lift the automatic stay. The court is most likely to grant such a motion if the landlord was already in the process of evicting a tenant prior to the bankruptcy filing.
2. File the Proof of Claim Promptly
To assure that the bankruptcy court will acknowledge a landlord's claims for back rent, the landlord must promptly file a Proof of Claim. This filing gives the court, the bankruptcy trustee, and other creditors official notice of the claim's existence and the amount. A landlord's claim for past due rent has an “administrative claim” status, making it a higher priority claim than that of many other creditors. However, if you do not comply with the filing deadline or attend the requisite hearings, or the claim will be forfeit.
3. File a motion to claim unpaid post-bankruptcy rent, if necessary
The Bankruptcy Code gives the debtor-tenant 120 days to decide how they want to handle the lease. They have three options: assume the lease, or assume the lease but assign it to a third party, or reject the lease.
If the tenant assumes the lease, whether alone or after assigning it to a third party, they agree to continue meeting their performance obligations. If they reject the lease, they terminate their performance obligations and must surrender the premises. Similarly, if the tenant lets the 120 days pass without making a decision, the court considers the tenant to have rejected the lease.
Although the automatic stay prevents landlords from collecting pre-bankruptcy unpaid rent, debtors-tenants must pay post-bankruptcy rent beginning 60 days after filing for bankruptcy. Moreover, they must comply with all lease provisions while deciding whether to assume or reject the lease. If the debtor-tenant fails to pay the rent as required, the landlord should file a Motion for Payment of Administrative Rent with the bankruptcy court to make these claims a priority.
The best way to preserve your rights is to contact a knowledgeable Arizona bankruptcy lawyer as soon as possible after receiving the Notice of Bankruptcy.