5 Tips for Dealing with Your Commercial Tenant’s Bankruptcy

Commercial property owners and property managers face numerous concerns when they receive notice that one of their tenants has filed for bankruptcy. For instance, will the tenant be able to pay rent, will the tenant assume or reject the lease, will the tenant vacate, when can the landlord retake possession and what happens to any personal property the tenant leaves behind? Obtaining this information quickly will help the landlord minimize any potential loss of revenue. Here are some tips for dealing with an unanticipated tenant bankruptcy:

1. Find out if it is a Chapter 7 or Chapter 11 or 13. A Chapter 7 means the business is liquidating, so you can be reasonably certain that the tenant will be vacating. If it is a Chapter 11 or 13 it is a reorganization and the tenant may or may not vacate and they have up to 210 days to decide whether or not they will accept or reject the lease. Maintain a line of communication with the tenant during this time to gauge their interest to stay in the premises. If it looks like they are going to leave you will not want to delay marketing the property for lease.

2. Stop all activities to evict a tenant or sue them in court. The filing of a bankruptcy triggers an automatic stay against most legal proceedings against the tenant. In order to restart your legal proceeding you need permission from the bankruptcy court, which generally involves what is known as a motion for relief from the automatic stay.

3. Do not engage in self-help by changing the locks to the premises or otherwise attempting to retake possession of the premises. Regardless of whether or not the tenant is in bankruptcy a landlord in California cannot retake possession without following the law.

4. If the tenant rejects the lease and vacates the premises, you will want to file a proof of claim in the bankruptcy. There is a cap that commercial landlords can claim, which needs to be calculated for use in the proof of claim.

5. Lastly, prior to any bankruptcy, when entering into a lease with a tenant the landlord should request a substantial deposit, letter of credit or a personal guaranty of the tenant’s principal(s). These types of precautions can be very advantageous to a landlord in the unfortunate event their tenant files for bankruptcy.

The information found on the Blake Law Firm website is provided for educational and informational purposes only. This information is not legal advice and does not create an attorney-client relationship. Prior results do not guarantee a similar outcome. If you need legal advice please consult a licensed, qualified attorney in your area.