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What happens to your business’s lease in bankruptcy?

On Behalf of | May 5, 2021 | Business Bankruptcy |

If you have reached the point where you want to file bankruptcy for your business, you may not be able to cover all of your costs every month. Especially if you can no longer operate the company as you once did, choosing to close your physical location might be a smart decision.

A bankruptcy can stop collection activity and help you eliminate certain unsecured debt. However, most commercial leases include provisions that require you to continue paying even if you close the business. What happens to your commercial lease when you file for bankruptcy?

Businesses still subject to a commercial lease must make a decision

If you file for bankruptcy while your business still has many months left on its lease, you will have to decide how to handle the lease, which is an executory contract. Within 120 days of your initial filing, you will need to notify your landlord about whether you choose to assume the lease, assign it or reject it.

If you assume the lease, you may renegotiate terms with them as part of your bankruptcy proceeding. If you choose to assign the lease, you can have someone take over for the remainder of its duration. If you reject your lease, that would effectively breach your lease. Your landlord will likely expect you to vacate the unit so that they can rent it to someone else.

Your landlord may also be able to claim certain damages during a bankruptcy filing, although they typically cannot pursue the full amount you would have to pay on your lease.

What damages can your commercial landlord claim?

Under the federal bankruptcy rules, a landlord whose tenant has chosen to reject the lease can ask for partial repayment in the form of rejection damages.

Typically, a landlord with a bankruptcy business tenant that wants to reject the lease can ask for a year’s worth of rent or 15% of the total amount due under the remaining lease, which could be worth up to three years’ rent.

While paying those penalties may not be as cost-effective as simply terminating your lease, it is certainly more beneficial than needing to pay for the entire remainder of the lease. Deciding how to handle your lease and negotiating how you will assume, assign or reject it can maximize the financial benefits your company secures from a bankruptcy filing.