Lease Terms and Tenant Defaults or Bankruptcy

The COVID-19 pandemic may be starting to abate, but certain sectors of the economy — including commercial real estate — will feel its effects for years to come. Commercial real estate owners in sectors hit hardest by the pandemic, such as hospitality, office leasing and malls, will have a slower recovery than industrial space or retail space dedicated to consumer staples. Some tenants will remain, but others will go out of business, leaving empty space and unpaid rent.

What options do landlords have if a tenant defaults on his or her leases, wants to renegotiate details, or declares bankruptcy? The answer depends on the terms of the lease.

Another important factor for commercial landlords to consider is related to the temporary changes made by the Consolidated Appropriations Act, 2021 (CAA), which was signed into law on December 27, 2020, to Chapter 11 of the Bankruptcy Code. The affected sections include Bankruptcy Code Section 365(d)(4) (giving debtors more time to decide whether to continue in their existing leases); Bankruptcy Code Section 365(d)(3) (extending the time for Subchapter V small-business Chapter 11 debtors to pay rent); and Bankruptcy Code Section 547 (allowing a debtor or a trustee to recover payments made by the debtor during the 90-day period prior to commencement of the bankruptcy case). These changes will sunset on December 27, 2022, but will apply to any bankruptcy case commenced before that date.

Wherever possible, commercial landlords should take the time now to review their tenants' leases and assess their options.

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