Commercial leases provide a stream of revenue for property owners and operating space for new or growing businesses. Leases are flexible and cost-effective, making it possible for businesses to adjust to changes in the economy.
However, they are also a major source of operational expense. Typically, commercial tenants commit to a multi-year lease when renting industrial, retail or office space. In some cases, business tenants may expand into too many new facilities in a short amount of time or may become insolvent as demand for their goods or services decreases.
Business tenants sometimes file for bankruptcy to either restructure the organization or eliminate debt during the business dissolution process. What typically happens to a commercial lease in a business bankruptcy scenario?
Tenants have several options available
Commercial leases frequently include terms that make tenants responsible for rent payments even when the company has ceased operating. As such, the closure or restructuring of the business does not automatically eliminate lease obligations.
The commercial tenant may need to explore several options when preparing for business bankruptcy. In some cases, they may be able to discharge a portion of the past-due rent that has become business debt. They may also be able to address the future contractual obligations related to the commercial lease.
Businesses in the midst of bankruptcy can reaffirm the lease if the landlord agrees to let them stay. They may make arrangements with the landlord to continue using the commercial space after the company restructures.
Other times, they may request the termination of the lease. Occasionally, landlords may even work with commercial tenants as they attempt to assign the lease to someone else willing to take possession of the space. The terms included in the initial lease, the willingness of the landlord to cooperate and whether the company is closing down entirely can all influence the best options for resolving ongoing commercial lease obligations during business bankruptcy.
Understanding that there are several viable solutions available for commercial leases can help executives and owners facing business bankruptcy address one of their most substantial financial obligations. Reviewing the terms of a commercial lease with a skilled legal team can be a good starting point for those who must address rented commercial space as part of a business bankruptcy filing.