A commercial tenant facing eviction may find relief under Chapter 11 of the Bankruptcy Code, particularly if the tenant fell behind on payments as the result of a temporary decline in income. While a Chapter 11 debtor cannot compel its landlord to reduce the monthly rent or eliminate past due rent, the filing of a Chapter 11 Petition will stop an eviction action and allow the debtor time to formulate a plan of action.
Absent abandonment or consent by the tenant, the landlord must file an eviction lawsuit in order to take possession of the business premises.[i] Once the landlord files a lawsuit to evict the commercial tenant, the tenant can stop the eviction action by filing of a Chapter 11 Reorganization.[ii] This allows the tenant time to remain in possession while it determines the best course of action. Bankruptcy Code Section 365 gives the tenant a deadline of 120 days to assume or reject the lease.[iii] The tenant may request that the bankruptcy court extend this deadline by 90 days, allowing up to 210 days for the tenant to assume or reject the lease.[iv]
Once the deadline arrives, in order to assume the lease and remain in the property, the tenant will need to provide a plan for promptly curing the pre-petition arrears.[v] The bankruptcy court’s interpretation of “prompt” cure will depend on the unique facts of each case, such as the remaining term of the lease.[vi] For instance, twelve months to cure arrears should be considered sufficiently “prompt” when the tenant has three years remaining on a five year lease. [vii] In contrast, curing pre-petition arrears over the remaining life of the lease will almost certainly be deemed inadequate by the bankruptcy court.[viii]
Should the tenant’s income prove insufficient to maintain the regular lease payment and cure the arrears within a reasonable period of time, Chapter 11 still offers the benefit of additional time to negotiate a reduced rent with the landlord. If the tenant cannot cure the arrears or reach an agreement with the landlord, the tenant must find an alternative location or close the business. If closure proves the only viable option, the tenant can file a Chapter 11 Plan of Liquidation or convert the case to a Chapter 7 in order to efficiently wind down the business and address any corporate liability for future rent or liquidated damages under the lease.
In summary, Chapter 11 may be a viable for a commercial tenant wishing to defend an eviction action and remain in possession of its business premises. For further information, contact an experienced professional to know your legal rights.
[i] Florida Statutes § 83.05.
[ii] 11 U.S.C. § 362(a).
[iii] 11 U.S.C. § 365(d)(4)(A).
[iv] 11 U.S.C. § 365(d)(4)(B).
[v] 11 U.S.C. § 365(b)(1)(A).
[vi] In re Embers 86th Street, Inc., 184 B.R. 892, 900 (Bankr. S.D.N.Y. 1995).
[vii] In re Citrus Blvd Imaging Ctr., LLC, 2012 Bankr. LEXIS 2208, at *11-12 (Bankr. N.D. Ga. 2012).
[viii] In re Gold Standard at Penn, Inc., 75 B.R. 669, 673 (Bankr. E.D. Pa. 1987).
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