This Article discusses the issues a landlord confronts when its commercial tenant files for bankruptcy protection. It also considers pre- and post-bankruptcy options available to a landlord to mitigate the impact of a tenant’s bankruptcy filing.
Section 365 of the Bankruptcy Code allows commercial tenants, as debtors, to take actions on their leases that greatly impact landlords. Subject to court approval and certain limitations, a debtor-tenant can use its reasonable business judgment to reject burdensome and unfavorable leases and assume leases that are beneficial to the debtor-tenant’s bankruptcy estate (11 U.S.C. § 365).
Purpose of Section 365 of the Bankruptcy Code
Section 365 of the Bankruptcy Code governs assuming, assuming and assigning, and rejecting commercial leases. These provisions serve to:
Further the federal bankruptcy goal of rehabilitating troubled companies while balancing the interests of all parties.
Maximize the value of the debtor-tenant’s estate (which includes the tenant’s interest in unexpired leases).
Provide some protection to non-debtor landlords.
In weighing the competing interests of the parties, Congress attempted to strike a balance, but the result is a system that favors the interests of the debtor-tenant (and its creditors) and leaves the landlord at a legal and practical disadvantage.