LANDLORD/TENANT BANKRUPTCY ISSUES
Residential and Business Leases
Most residential tenants will file a Chapter 7 or a Chapter 13 bankruptcy. Two issues arise in such a situation, eviction of tenants in default and the effect of the bankruptcy on the lease.
A landlord's right to evict a consumer debtor will depend in large part on whether the landlord had initiated eviction proceedings before the bankruptcy filing the reasons for the eviction and whether the tenant/debtor has cured the default. When a tenant files a bankruptcy the automatic stay prevents Landlords from pursuing an eviction or any other proceeding for money damages.
If the landlord has, before the bankruptcy filing, obtained a state court order granting the landlord possession of the property, the stay will automatically cease 30 days after filing. The landlord then can proceed with the eviction process to obtain possession of the real property. The personal property which the debtor has within the residence can not be taken, since it now belongs to the bankruptcy estate. The debtor may prevent the stay from ceasing by filing and serving a certification within the 30 days which shows that the tenant can or has satisfied the default in payments which allowed the judgment for possession and if the payment has not been made directly to the landlord that the debtor has deposited any rents coming due in the 30 days with the bankruptcy court clerk. The landlord has a right to contest the certification in which case the Court will hold a quick hearing to determine the truth.
This means a landlord who has been diligent in obtaining a judgment granting them possession, may on an accelerated basis regain possession of the property, unless the debtor/tenant can cure the default. The tenant who is filing bankruptcy must be aware that their right to stay in the leased property may be dramatically limited if they delay filing until after the landlord has a judgment granting the landlord possession of the property.
There are also provisions which can provide landlords quick relief if the reason for an eviction is based on endangerment of the property or the illegal use of controlled substances on the property. The landlord can obtain a relief from stay by filing with the bankruptcy court a certification that the eviction action has been filed for such reasons or that, within 30 days prior to the petition date, the debtor has endangered the property or used illegal drugs on the property. The debtor then has 15 days to file a response to the certification or the court will grant the relief from stay allowing the eviction process to proceed. If the tenant/debtor does file the response then the Court will hold a quick hearing to determine if the violations occurred and if so whether the problems were remedied.
Assumption and rejection of Leases.
Bankruptcy law also requires that a lease must be assumed within a certain time period. In Chapter 7 that time period is 60 days, which can be extended for good cause, usually because a trustee believes that the lease is assignable and the terms are favorable enough that others will pay money for the opportunity to assume the lease. In a chapter 13 the debtor has until the confirmation of a chapter 13 plan to assume or reject the lease. The debtor or the trustee must pay the post petition lease and otherwise perform all of the obligations in the lease. If they do not the landlord can relief from the automatic stay and proceed to obtain possession of the premises. A lease that is not assumed in a timely fashion is deemed rejected and therefore terminated. If for some reason the landlord needs to have the lease rejected or assumed on an earlier date, they can file a motion to require the rejection or assumption to take place on a date before the code otherwise requires.
If the lease is rejected either automatically or by written rejection, then the landlord may be entitled to damages. The lease is deemed rejected as of the date of the filing, the stay is lifted and the landlord may proceed under state law to take possession of the property. The landlord may file a claim in the bankruptcy court for rejection damages and for pre-petition rent that was due, and for any actual damages to the property. The rejection damages do have limitations so the claim should be prepared with the assistance of competent bankruptcy counsel. An accounting for any deposits and/or reserved rents must be made to the trustee.
If a lease is assumed by a debtor or the trustee, they must show that any monetary defaults will be promptly cured and provide adequate assurances that the lease will be otherwise fully performed. In Chapter 13 cases, if there is an existing default in the payments, the debtor frequently can propose that the cure will come from their chapter 13 plan payments. Landlords can and should request that those cure payments be paid to the landlord with a higher priority and a shorter term than the full length of the plan.
Obviously the strategies of a landlord/creditor and the tenant/debtor differ dramatically. Landlords are well advised to consult with a competent bankruptcy attorney concerning their rights. The debtor usually has an experienced bankruptcy working for them who will act to protect the debtor. If the landlord sits upon his rights those rights may be permanently prejudiced. Likewise if the landlord proceeds without representation or ignores the bankruptcy proceeding, they may well find themselves in contempt of court.
Generally the provisions in the code are similar for commercial landlords as they are in consumer cases. The primary differences are as follows:
- Commercial tenants has an expanded 120 day period to assume or reject a lease, and upon request of the debtor the court can only expand that time by 90 days, unless the landlord consents to a longer extension of time
- Commercial tenants have the same 120-210 day time period to designate a replacement tenant. The replacement tenant however must fully perform the monetary and non-monetary terms of the lease.
- If a lease is initially assumed but then later rejected by a commercial tenant the commercial landlord's claim obtains the priority of an administrative claim in the amount equal to two years of rent (assuming that the term of the lease would have been in excess of two years.
NOTE: There are special provisions in the bankruptcy code regarding shopping center leases and protecting sub-tenants. If you are involved with either of these issues you should consult your attorney since your rights will likely differ from above.