Tenant Files Bankruptcy: What To Do

Chapter 11 filings by retailers are rising. Here is an outline of a simple strategy for landlords.


Here are three important issues:

I.    Ensure Your Rights To Payment
II.   Will The Lease Be Assumed Or Rejected?
III.  How To Improve Your Odds At Minimal Cost

I.    Ensure Your Rights To Payment. First things first, consult counsel and determine if there is any reason you do not want to file a Proof of Claim.  Then immediately review the tenant's (“Debtor’s”) account and lease files with your bankruptcy counsel. There are three classifications of claims typically filed by landlords:

1) Pre-Petition Claim.
 Everything the Debtor owes you up to the filing of the Bankruptcy Petition.

2) Ordinary Course Administrative Claim.
 Bankruptcy Code Section 365 (d)(3) requires the timely payment of your rent. Is the Debtor using your property to the benefit of the Bankruptcy Estate? Yes, and you are to be paid rent on time from the date the case was filed. If the Debtor is failing in its obligation to keep current on its Post-Petition rent then consider filing a Motion For Stay Relief as a precursor to an eviction proceeding.

3) Lease Rejection Claim. If the Debtor decides to terminate your lease you will be entitled to make a claim for your “Rejection” damages.

II.    Will The Lease Be Assumed Or Rejected?The Tenant will have 120 days to decide to Reject or Assume the lease. This may be extended, for cause (its usually granted), another 90 days. If the lease is assumed all arrearages must be paid immediately or adequate assurance of performance must be provided.

III.    Improve Your Odds At Minimal Cost. One of the best methods for improving your treatment in a Chapter 11 case without coming out of pocket with cash is get appointed to the Creditors' Committee. This is not a big time commitment and you can get lots of bang for the buck. Appoint an administrative staff member to represent your company on the Committee. The Committee will hire professionals (at the expense of the Bankruptcy Estate). Committee members have conference calls as needed. Good professionals will keep the Committee informed and handle the matters on a day-to-day basis. An effective Creditors Committee often will enhance the treatment of unsecured creditors.

Be proactive. Remember get counsel early and ask questions right away. Inquire about the formation of a Creditors Committee.

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