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Your commercial tenant is bankrupt. Now what?

On Behalf of | Feb 1, 2024 | Business Bankruptcy, Commercial real estate issues |

Small businesses do not always succeed. Still, it can be unsettling to discover that your commercial tenant is now unable to pay debts and obligations due to financial difficulties. Moreover, this unexpected development puts your rental income at risk.

This is a challenging time, but understanding the process, your options and your rights may save you from suffering huge losses.

You must suspend all collection activities

When a debtor files for bankruptcy, the court imposes an automatic stay that immediately puts a stop to all collection activities by creditors, including landlords. If your tenant owes you rent before filing, consider consulting an attorney before issuing them any late payment notices or similar collection actions. Otherwise, you could face significant legal penalties.

In addition, you cannot evict the debtor or terminate a lease until the Bankruptcy Court grants you relief from automatic stay. After obtaining approval, you may proceed with the usual measures you would have taken if your tenant was not bankrupt.

What if the tenant stays on the property after filing bankruptcy but fails to pay rent? The relief will allow you to claim the due rent and pursue eviction.

Tenant must assume, reject or assign the lease

Within 60 days after filing, the tenant must make one of the following decisions concerning an unexpired lease:

  1. Assume the lease and continue meeting their obligations
  2. Assume and assign the lease to a third party
  3. Reject the lease and leave the premises

The tenant can decide how to proceed with the lease without consulting you. However, the Bankruptcy Court must give the green light on their next steps. If you are not on board with the tenant’s decision, you’ll get an opportunity to object.

One crucial thing to remember is that if the tenant fails to make up their mind within 60 days or fails to get an extension, the lease will be rejected. As a landlord, you would be free to find a new tenant or use the premises as you see fit.

Don’t face this alone

Once you learn your tenant has filed for bankruptcy, you must act quickly or risk missing crucial deadlines.

Yet, bankruptcy laws can be tricky. Consider consulting a lawyer to ensure you are on the right track. They can help you make informed decisions and guide you through the various processes while keeping your best interests in mind. This is not the best time to make any missteps that could lead to further financial difficulties.