Business and Legal Insights

Commentary By: James A. Timko

The following is the second in what will be a series of posts addressed to commercial landlords regarding bankruptcy.

When a Chapter 11 bankruptcy case is filed, a commercial landlord with a defaulting or even a non-defaulting tenant may ask – now what? In this post we will address the automatic stay and its injunction against certain actions by a landlord. In future posts we will address the assumption and rejection of leases, Chapter 7 and Chapter 11 bankruptcy cases, the filing and preparation of proofs of claims and other considerations.

What is the automatic stay? 

The automatic stay is an injunction that comes into being immediately upon the filing of a bankruptcy case. Violation of the stay injunction may result in a finding of certain types of damages and sanctions against a landlord in the bankruptcy court. The stay prevents, among other things, attempts to collect debts from a debtor that were due and owing prior to the filing of the bankruptcy petition. These prepetition debts are to be handled through the bankruptcy process. 

Once the tenant files for bankruptcy protection, however, they are required to stay current on their post-petition lease obligations unless they obtain further relief from the Court or reject the lease (lease rejection will be addressed in a future post). If the tenant does not meet its post-petition obligations, however, the landlord is still prevented by the automatic stay from evicting the tenant.

The question then remains; what may the landlord do during the pendency of the bankruptcy case?

It depends. If you have a tenant that is not paying rent, the landlord can file a motion for relief from the automatic stay to evict the tenant or request that the lease be rejected by the tenant. The landlord may file a motion requesting that the Court compel the payment of post-petition rent.   

Even if the tenant is performing post-petition but defaulted prior to the bankruptcy filing, the landlord may file a motion for relief from the automatic stay to offset a security deposit, offset outstanding tenant allowances or offset excess rent payments against prepetition rent arrearages.

As discussed in ”Pre-Bankruptcy Considerations for Commercial Landlords,” without relief from the automatic stay, the landlord may be able to exercise a letter of credit (consult counsel before taking this step) and the landlord may also initiate court proceeding to assert its rights under a guaranty against a non-debtor guarantor.

While many of these discussed options are treated in a similar fashion by most bankruptcy courts, there may be complicating circumstances and certain courts differ in their interpretation of the Bankruptcy Code.  Landlords should discuss their options with legal counsel when determining if their actions are prevented by the automatic stay.