When a commercial tenant files for bankruptcy a landlord is often faced with numerous challenges.  First, if a tenant enters bankruptcy it is likely that they owe an outstanding balance.  Second, the bankruptcy filing may make the tenant’s obligation to pay rent as it comes due unclear.  Third, the bankruptcy proceeding creates obstacles to evicting the tenant.

 

Pursuant to Section 362(a) of the Bankruptcy Code (the “Code”), the filing of a bankruptcy initiates what is called the “automatic stay.”[1]  The automatic stay acts as a bar requiring the landlord to cease any efforts to collect rent or evict the tenant.  After the tenant files for bankruptcy, the landlord’s sole remedy is effective navigation of the bankruptcy court proceeding.  A prudent landlord must carefully consider any activities related to the tenant which could be viewed as violating the automatic stay.[2]

 

After the initiation of a bankruptcy proceeding, all past-due rents are viewed as pre-petition obligations.  As such, the landlord is essentially an involuntary creditor and the outstanding balance is treated as unsecured debt.[3]  Nevertheless, the landlord should pursue all rights it has to payment as an unsecured creditor in the bankruptcy case.

 

Although the prospects of payment for pre-petition rent are marginal, a tenant in bankruptcy is responsible for payment of all post-petition obligations pursuant to Section 365(d)(2) of the Code.  Therefore, a tenant that remains in possession of the leased premises after filing for bankruptcy is required to pay rent as it becomes due.  If the tenant fails to pay rent, the landlord may petition the bankruptcy court for permission to commence state court eviction proceedings or move to compel payment of post-petition rent.

 

Tenant bankruptcies complicate what are often already frayed landlord-tenant relationships.  Prompt and diligent compliance with the bankruptcy court’s rules is essential to securing a landlord’s rights.  Please do not hesitate to contact an attorney at MBW Law, LLC for assistance in navigating the complexities of tenant bankruptcy.

[1] 11 U.S.C. § 362.

[2] Even if the landlord has already received a writ of possession, if the landlord executes the writ it risks violation of the automatic stay.

[3] Unsecured creditors are the last parties in line to receive payment in a bankruptcy proceeding.