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A commercial tenant files bankruptcy and stops paying rent. What should a landlord do? One option is to immediately file a motion for payment of administrative rent.
Unless a tenant is a large, newsworthy national chain, a landlord usually finds out about a tenant’s bankruptcy through a notice in the mail. Unfortunately, for most landlords this means the tenant stops paying rent as well. Fortunately, commercial landlords are protected under the bankruptcy code by a provision that provides for the debtor to pay administrative rent to the landlord. However, the payment of administrative rent is not typically an automatic process. Unless a landlord asserts its right in the tenant’s bankruptcy, the tenant could remain in the space for months or even years without paying any rent. So, what is administrative rent and why is it important?
When a commercial tenant files for bankruptcy protection under Chapter 11 (reorganization) or Chapter 7 (liquidation), it immediately receives the benefit of the “automatic stay.” Generally speaking, the automatic stay prevents the commencement or continuation of any action against the debtor. This includes the filing of an eviction action or an action to collect rent. Moreover, upon the filing of the bankruptcy, most debtors stop paying their obligations except those authorized by the court. This is done to provide the debtor “breathing room” from creditors, allow the debtor to marshal its cash and other assets, and provide for an orderly reorganization or liquidation of the company.
Often, the marshaling of assets means the rent does not get paid. Moreover, without obtaining approval from the bankruptcy court, the landlord cannot evict the tenant. But for how long? It depends. If the landlord does nothing and the estate is ultimately administratively insolvent, or the landlord fails to file a proper timely proof of claim, the rent may never get paid, and one day the tenant will just move out. If the tenant is reorganizing and assumes the lease with the intent of continuing to operate in the space, it could be a few months to several years. It all depends on the strategy and the assets of the tenant in bankruptcy, and how aggressively the landlord asserts its rights. Simply put, if the landlord does not ask, it probably will not be paid any time soon. Fortunately, a landlord that promptly asserts its rights in a tenant’s bankruptcy case will either be promptly paid rent or obtain possession of the property.
Under the bankruptcy code, a debtor may accept a lease, but only under certain conditions, including the payment of rent or other adequate assurances. In addition, a tenant is required to perform its obligations under an unexpired nonresidential lease until the debtor rejects the lease or the lease is deemed rejected. These obligations include the timely payment of rent. However, once the lease is rejected, the debtor is no longer required to pay rent and is not entitled to possession. That does not mean the tenant will immediately move out. Although the bankruptcy code provides specific deadlines for these actions to protect the landlord, a landlord must appear and actively assert its rights in the tenant’s bankruptcy case to ensure the tenant’s payment of rent or the timely return of possession of the space to the landlord.
- Christian A. Petersen is a complex commercial litigator with the Florida law firm of Olive Judd. P.A. Christian represents Florida businesses, as well as national and international clients, in state court, federal court, and arbitrations throughout Florida and the United States. His practice includes representing creditors as claimants and defendants in bankruptcy proceedings.