MBT | McKay, Burton & Thurman, P.C. | Attorneys At Law

What happens to a commercial lease during business bankruptcy?

On Behalf of | Jun 8, 2023 | Bankruptcy Law, Business Law

Businesses are under constant pressure to generate revenue. Only a few weeks of decreased sales might prevent an organization from meeting its financial responsibilities. Businesses have numerous recurring expenses they have to cover to continue operating. They have to pay their staff and contribute to payroll taxes. They have to cover materials and supplies for business operations and make payments on any lines of credit that they have. Many also need to pay rent for at least one commercial or retail space.

Quite a few businesses fail despite the best efforts of an owner or manager, while others may become insolvent and need to restructure carefully to continue operating without going into the red. A business lease might be a major drain on a company’s budget, especially if it has multiple facilities. What happens to commercial leases when a business files for bankruptcy?

There are three options for ongoing financial contracts

A commercial lease is a kind of contract that is subject to special federal rules related to business bankruptcy. Given that the lease imposes ongoing obligations on the business but also may relate to the company’s ability to operate, there are different solutions that may work in different scenarios. In some cases, the tenant will be able to terminate their lease and vacate the premises. Even if the lease should last for another significant length of time, the tenant may not have to pay those additional months of rent and will be able to discharge what they owe at least partially in the bankruptcy. This outcome is common in Chapter 7 filings.

Other times, the tenant wants to reassign the lease. They may have already found another party that will take over their lease, which can smooth the transition for the landlord and show that the tenant has done their best to operate in good faith. Finally, the tenant has a right to potentially renegotiate and then reaffirm the lease. Particularly in restructuring bankruptcies, it may be possible to work with a landlord to change the terms of a lease and make it more sustainable for the business.

Both businesses hoping to remain solvent and those preparing for closure may need to address one or more leases during bankruptcy proceedings. Learning more about the unique rules for business bankruptcies can help executives and owners maximize the benefits that they derive from filing.