New and growing businesses often sign leases for commercial space. Doing so is frequently a better solution than buying property outright. The company has more flexibility to change to a different facility as its needs shift over time. Additionally, the tenant can share certain maintenance and repair requirements with the landlord. That can be beneficial for smaller start-ups and growing companies without an established maintenance department.
Unfortunately, a lengthy commercial lease can be a major source of pressure on a business’s operating budget. Companies often dedicate thousands of dollars monthly toward rental space and maintenance fees. They may eventually struggle to cover those costs if the company goes through a difficult financial period. Sometimes, financial struggles are so severe that bankruptcy becomes the best option.
If a business owner files for bankruptcy to restructure or dissolve the company, they likely need to address their commercial lease. What happens to a commercial lease during business bankruptcy?
There are special rules for business leases
Commercial bankruptcy rules are incredibly thorough. They address everything from asset liquidation in Chapter 7 filings to creditor rights during restructuring efforts. The law also acknowledges how many businesses have executory contracts with ongoing financial obligations attached.
A lease falls into that category of contracts. The tenant can propose several solutions for the lease. They can ask to terminate the lease and end their contractual obligation with the landlord. That may be the best option for those dissolving a business. They can also assign the lease to someone else in many cases. That arrangement can be beneficial for businesses downgrading their facilities and worried about the landlord demanding payment for the duration of the lease.
In some cases, tenants have the negotiate and reaffirm the lease with the landlord. Provided that the landlord is amenable, they may be able to adjust the terms to reflect the status of their business after an attempt at restructuring through bankruptcy. Each of these solutions offers certain benefits and also specific drawbacks.
Business owners and executives preparing for commercial bankruptcy often have a lot of planning to do and difficult decisions to make. Deciding what should happen with a commercial lease is often one of the most important decisions that must be considered during business bankruptcy.