Less of a Waiting Game: The 2005 Bankruptcy Act and Commercial Landlords

Michael Louis Esquire
June 5, 2008 — 998 views  
While making bankruptcy more difficult for debtors and their attorneys, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 also created significant changes for commercial landlords dealing with debtor tenants. The amendments, which became effective October 17, 2005, mean additional hardships for debtors, but provide landlords with greater advantages, most notably in regards to how long they must wait for an answer on lease assumptions or terminations.  

Prior to the new Act, the Bankruptcy Code provided that a lease of non-residential real property was deemed to have been rejected if the debtor did not assume the lease either within 60 days after filing or within such additional time as the court for cause, within the 60-day period, fixed. The court could extend the assumption period without limitation provided the debtor showed cause, such as complexity of the case or the need for additional opportunity to formulate the reorganization strategy or to analyze the leasehold value. A general rule of thumb was that the court would almost always allow the debtor to operate through one Christmas season before the court would require the debtor to make a decision on its commercial lease. This would often put landlords in the awkward position of having a tenant that would have the right to terminate his or her lease at any time for space that could be the anchor for the landlord's shopping center. Even if the landlord found a new tenant, he or she could not force the debtor to assume or reject the lease. Therefore, the landlord could not tell its prospective tenant whether it definitely had space available or when it might be available.

Changes Under the Act
The amendments expand the initial evaluation period from 60 days to 120 days but limit the extensions for cause to an additional 90 days, resulting in a maximum of 210 days for the tenant to assume or reject its lease, unless the commercial landlord consents in writing to further extension. The new limitation on extensions could result in substantial hardship to a retail debtor who must complete the analysis of multiple leases (sometimes hundreds or thousands of locations). However, it is very helpful to landlords who now can begin negotiating with prospective tenants just in case the debtor rejects the lease. The commercial landlord can tell the prospective tenant that a "worst case" scenario for delivering possession will be 210 days after the commercial tenant filed its bankruptcy petition.

Another advantage of the 210-day time limitation is that, if the bankrupt tenant decides to assume a lease but later cannot successfully operate at that location, the landlord's claim in the bankruptcy becomes an administrative expense claim as opposed to an unsecured claim. While this will place a burden on the bankrupt debtor's estate, it will provide further protection to commercial landlords. However, in apparent recognition of the risk inherent in an improvident and premature election by the debtor to assume a lease, the amendments impose a new cap on the maximum allowed administrative expense claim for the landlord under a rejected lease that had been previously assumed. The new Act limits the rejection claim to a sum "equal to all monetary obligations due...for the period of two years following the latter of the rejection date or the date of actual turnover of the premises..."

Winners and Losers from the New Legislation
In conclusion, the parties least likely to benefit from the business bankruptcy amendments are the debtor's senior managers who are under substantial pressure to make correct decisions in less time. In general, the short-term beneficiaries of the recent legislation are commercial landlords, who will enjoy less of a "waiting game" when it comes to debtor tenant decisions.

Michael Louis Esquire

MacElree Harvey