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What you need to know if a commercial tenant files for bankruptcy

On Behalf of | Mar 31, 2022 | Real Estate

When a small business owner files for bankruptcy, it has a ripple effect. Among those to feel the impact are their landlords. What do you need to know if you have a commercial tenant who’s filing for either Chapter 7 or Chapter 11 bankruptcy?

First, there are some protections that tenants have when they file for bankruptcy. For example, a landlord is not allowed to terminate a lease or consider it breached because a tenant files for bankruptcy. They’re also not allowed to change the payment or security deposit terms.

If a tenant’s lease is still in effect when they file for bankruptcy, they have 60 days to either assume or reject it, and they may ask for an extension of that deadline. If the tenant has filed Chapter 7, which is considered a “liquidation bankruptcy,” the bankruptcy trustee may decide to assume the lease if it will be useful to have as the business’s assets are sold – for example, for a liquidation sale for a store. The tenant may keep the lease for the same reason in a Chapter 11 bankruptcy where they’re reorganizing their business.

When can you evict the tenant?

If the tenant or the trustee rejects the lease (or takes no action, which in effect rejects or cancels it), a landlord can start taking steps to evict them if they aren’t vacating willingly. 

Typically, if you know that a tenant will not be assuming the lease, it’s in the landlord’s best interests to start looking for new tenants and not allow any extensions of that 60-day period. If a tenant stops paying their rent only after they’ve filed for bankruptcy, that debt is farther down the list of those that have to be paid than any rent they owed before the filing.

Whether you have a tenant whom you believe is headed for bankruptcy or you’ve had one unexpectedly file for bankruptcy, it’s crucial to immediately take steps to protect your financial interests and your property. It’s wise to seek legal guidance as soon as possible.

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