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Landlords' Rights in Chapter 11: Protecting Your Post-Petition Rent Stream

How do you, as a commercial landlord, ensure that you are paid by a tenant that has filed for Chapter 11 bankruptcy protection? Despite the automatic stay under Section 362 of the Bankruptcy Code, which generally prohibits creditor enforcement actions, the answer is quite simple. Section 365(d)(3) of the Bankruptcy Code, aimed at landlords of non-residential real property, requires that a tenant pay all of its lease obligations arising on and after the entry of an order for relief (i.e., the petition date in a voluntary bankruptcy) unless and until it rejects the lease. However, a debtor can request that the court postpone performance of its obligations under the lease for 60 days, thus allowing the tenant to continue to occupy your premises without paying rent.

The special protection provided by Section 365(d)(3) was included in the Bankruptcy Code because landlords are involuntary creditors of a bankruptcy estate and are bound to a lease of non-residential real property until the debtor-tenant decides to assume or reject that lease. A debtor-tenant automatically has up to 120 days after the entry of the order for relief to make its decision, and that time period can be extended by 90 days upon order of the court.

The obvious question for a commercial landlord facing these circumstances is, "How can I compel my tenant to pay the rent?" The simplest method is to remind your bankrupt tenant of its obligation to make post-petition rent payments. If that approach does not work, you may file a motion with the bankruptcy court requesting an order compelling the tenant to pay the rent. Be sure to cite the case law that references the special nature of Section 365(d)(3). You should also file this motion as quickly as possible, with the goal of appearing in court before rent continues to accrue.

In your motion, be sure to cite Section 365(d)(3), which states that "[t]he trustee1  shall timely perform all the obligations of the debtor…" (emphasis added). Confronted with the plain language of the Bankruptcy Code, the court is likely to order the payment of rent. Alternatively, if the debtor cannot or will not pay the rent, the court may enter an order requiring the tenant to reject the lease immediately. The upside of this outcome is that the tenant must relinquish possession of the premises, thus returning control of the property to you. Although not as useful as the rent you are owed, this allows you to re-let the premises. Moreover, it does not foreclose your ability to seek payment of the post-petition rent due to you.

For commercial landlords, the Bankruptcy Code provides specific and special rights. You and your restructuring professional should utilize those rights to secure payment of post-petition rent and to potentially regain possession of your property.

1Section 365(d)(3) applies with equal force to debtors-in-possession, as well as trustees.

© 2022 Much Shelist, P.C.National Law Review, Volume II, Number 48
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About this Author

Jeffrey L. Gansberg, Much Shelist Law Firm, Bankruptcy Attorney
Special Counsel

Jeff Gansberg is an experienced bankruptcy, creditors' rights, and trial attorney with an extensive background in both the transactional and litigation aspects of insolvency, reorganization and creditors’ rights representations. Jeff represents debtors, trustees, creditors and creditors’ committees from a wide range of industries, including health care, travel, transportation, manufacturing, retail, insurance, entertainment and communications. Jeff has represented constituencies in restructuring matters including workouts, forbearance agreements, and assignments for the benefit of...

312-521-2649
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