A commercial lease is an expensive contract. The business leasing commercial space might commit to thousands of dollars in monthly payments for multiple years. The company may also have to cover maintenance costs or manage the maintenance of the space with its own resources. Those obligations may persist even if the business wants to move to a bigger or smaller space that better suits its operational needs. Even if the company fails, the lease may still remain an ongoing obligation.
Landlords often demand payment for the remaining months on a lease when a tenant seeks to vacate a commercial space before the lease actually ends. A landlord might potentially be able to retain a tenant’s security deposit or file a lawsuit against a business for a breach of their lease.
One of the scenarios that might arise if a business tenant becomes insolvent is that the company’s leadership may decide to file for bankruptcy. What happens to a commercial lease during business bankruptcy proceedings?
A lease is an executory contract
Some kinds of obligations are easy for a business to discharge in bankruptcy. Unsecured lines of credit are often eligible for discharge. Businesses can also potentially negotiate better terms for secured financial instruments like equipment loans. A lease theoretically creates ongoing obligations for both the landlord and the tenant. It is an executory contract that is subject to special bankruptcy rules. The tenant can choose several solutions when pursuing a business bankruptcy.
They can ask the landlord for release from the lease, which means they need to vacate the premises. The tenant may be able to discharge some of the rent due to the landlord in that scenario. Other times, the tenant may be able to negotiate with the landlord to arrange to assign the lease to a different business that wants to assume tenancy in that space. It is also possible for the commercial tenant and the landlord to renegotiate the lease and reaffirm it.
Each of those solutions offers both benefits and drawbacks for commercial landlords. Understanding what may happen when a tenant files for bankruptcy can help landlords push for the best possible outcome when it comes to a commercial lease. And, proper legal guidance can help to minimize the financial harm caused by a commercial tenant’s bankruptcy.
