Business bankruptcy does not necessarily mean the end of a company, but it does generally cause a dramatic shift in finances. Companies usually have to reevaluate their financial obligations, including executory contracts such as commercial leases.
A lease can make a company responsible for rent payments for multiple years. What options are available for addressing a commercial lease as part of a business bankruptcy?
1. Reaffirming the lease
Tenants often choose to reaffirm their leases if they want to continue operating the company. In cases involving reorganization, a landlord might be open to renegotiating some of the terms of the lease to make them more sustainable for the tenant. Reaffirming the lease allows the tenant to continue using the space even after the bankruptcy.
2. Assigning the lease
Landlords sometimes allow for lease assignment in their original paperwork. Other times, they may agree to an assignment where an outside party takes over the lease when a tenant intends to close a company due to bankruptcy. Lease assignment is beneficial for the tenant, who can eliminate financial obligations, and for the landlord, who can avoid a lengthy vacancy and months of unpaid rent.
3. Terminating the lease
Early lease termination can be part of the bankruptcy process. Particularly in a Chapter 7 bankruptcy case where a business is about to close or in a Chapter 11 filing where the business proposes to close multiple locations to regain solvency, eliminating a commercial lease by terminating it early may be the best option available.
Discussing the terms of a business lease and the options for addressing it with a skilled legal team can be beneficial for business leaders preparing for bankruptcy. Each solution has different benefits, depending on the intention behind the bankruptcy filing at issue.