Author: Andrew M. Thaler
Chapter 11 reorganization allows the debtor to reject undesirable leases. If the debtor opts to reject the lease, the landlord is left with a breach of contract claim. In most instances rejection claims against the bankruptcy estate will be for less than the remaining rents under the lease as the claim is capped pursuant to the bankruptcy code.
Alternatively, the debtor can elect to assume the lease. Assumption requires the debtor to cure all prepetition defaults, including payment of all past due rents, on assumption. The debtor has 120 days, which can in certain circumstances be extended another 90 days, to assume or reject the lease. During the time debtor decides to assume or reject the lease, all post-petition obligations, including payment of rent must be paid. The court may “for cause” extend the time for performance of any post-petition rent, for up to an additional 60 days.
Alternatively, the debtor can elect to assume the lease. Assumption requires the debtor to cure all prepetition defaults, including payment of all past due rents, on assumption. The debtor has 120 days, which can in certain circumstances be extended another 90 days, to assume or reject the lease. During the time debtor decides to assume or reject the lease, all post-petition obligations, including payment of rent must be paid. The court may “for cause” extend the time for performance of any post-petition rent, for up to an additional 60 days.
The COVID-19 pandemic has decimated the retail industry. Household names like J. Crew, Pier 1 and J.C. Penney have filed for bankruptcy relief. Because these companies were forced to close their stores under shut-down, orders many have successfully argued that any obligation to pay current rents should also be postponed unless and until they are allowed to fully reopen their store locations.
The majority of the courts faced with this issue have been sympathetic to the exigent circumstances created by the pandemic and granted motions which postpone the debtor’s obligation to pay rent. This is a significant divergence from previous strict enforcement of landlord’s rights under the bankruptcy code. Courts that have granted this relief have justified it based upon catch all provisions of the bankruptcy code that gives courts latitude to issue orders necessary or appropriate to carry out the provisions of the bankruptcy code.
But when a catch-all is in direct contravention of the provisions of another section of the bankruptcy code, there is going to be push back and justifiable cause for concern about what other provisions of the bankruptcy code will be disregarded or watered down. Courts that have issued deferral orders have justified their decision on the fact that the rents will be given “administration” claim status. That means that it will be paid ahead of pre-petition claims in the pecking order of who gets paid from the debtor’s assets. However if the store goes dark and completely out of business or the company is administratively insolvent, the landlord will not get paid in full.
Landlords have been prevented from taking action in state court to evict debtors. Worse, landlords have become involuntary lenders to the debtor by virtue of debtors being allowed to remain in their stores without paying rent. The non-payment of rent it would seem indirectly and unfairly serves to benefit debtor’s secured creditors whose recovery will be enhanced by the rent holiday afforded by the court.
Most of the decisions have come out of the large retailer bankruptcy cases. In the Pier 1 case the court justified deferral of payment of rents because no one could have predicted that the world would effectively grind to a halt, the nation is in a public health crisis and the landlord’ s administration claim will get paid at the end of the case.
As restrictions on store owners lift or ease it remains to be seen if courts will continue to defer payment of rents to landlords. If landlords are not paid their rents, are landlord bankruptcies on the horizon?
The majority of the courts faced with this issue have been sympathetic to the exigent circumstances created by the pandemic and granted motions which postpone the debtor’s obligation to pay rent. This is a significant divergence from previous strict enforcement of landlord’s rights under the bankruptcy code. Courts that have granted this relief have justified it based upon catch all provisions of the bankruptcy code that gives courts latitude to issue orders necessary or appropriate to carry out the provisions of the bankruptcy code.
But when a catch-all is in direct contravention of the provisions of another section of the bankruptcy code, there is going to be push back and justifiable cause for concern about what other provisions of the bankruptcy code will be disregarded or watered down. Courts that have issued deferral orders have justified their decision on the fact that the rents will be given “administration” claim status. That means that it will be paid ahead of pre-petition claims in the pecking order of who gets paid from the debtor’s assets. However if the store goes dark and completely out of business or the company is administratively insolvent, the landlord will not get paid in full.
Landlords have been prevented from taking action in state court to evict debtors. Worse, landlords have become involuntary lenders to the debtor by virtue of debtors being allowed to remain in their stores without paying rent. The non-payment of rent it would seem indirectly and unfairly serves to benefit debtor’s secured creditors whose recovery will be enhanced by the rent holiday afforded by the court.
Most of the decisions have come out of the large retailer bankruptcy cases. In the Pier 1 case the court justified deferral of payment of rents because no one could have predicted that the world would effectively grind to a halt, the nation is in a public health crisis and the landlord’ s administration claim will get paid at the end of the case.
As restrictions on store owners lift or ease it remains to be seen if courts will continue to defer payment of rents to landlords. If landlords are not paid their rents, are landlord bankruptcies on the horizon?
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