Changing the Code
Recent changes to bankruptcy laws give landlords more leverage in tenant bankruptcies.
By Steven E. Ostrow |
On April 20, 2005,
President Bush signed into law the Bankruptcy
Abuse, Prevention, and Consumer Protection Act of 2005. While the act
reforms the bankruptcy laws affecting consumer cases, it also contains
a number of amendments applicable to business insolvencies. One of the
most significant changes involves the
U.S. Bankruptcy Code and the treatment of commercial leases.
under the recent amendments debtor/tenants cannot extend the time to
reject commercial leases past 210 days, or seven months, from the
filing without their landlord's consent.
The amendments affecting commercial leases apply to
bankruptcy cases filed on or after Oct. 17, 2005. Commercial real estate
owners, managers, and professionals should understand how this act changes
landlords' and tenants' rights and obligations in bankruptcy, particularly with
respect to the assumption or rejection of leases.
New Time Periods
Prior to the act, the Bankruptcy Code provided that
debtor/tenants' unexpired commercial leases automatically were deemed rejected,
unless the debtor assumed or rejected the lease within 60 days of filing for
bankruptcy. However, the bankruptcy court was permitted to extend the time
period beyond the initial 60-day period.
Before the act, the length of the extension was not
limited, effectively leaving the decision up to the court's discretion. As a
result, it was commonplace, especially in reorganizations of national retail
tenants with hundreds of store locations such as Kmart, for courts to grant
debtors' successive requests to extend the time periods to assume or reject
their commercial leases. Extensions frequently ran up to 18 months, and some
continued until the date a debtor's plan of reorganization was confirmed, often
years after the initial bankruptcy filing.
These long extensions afforded debtors more time to
formulate reorganization plans and to decide which stores and leases to keep,
sell, or close. However, during this period debtors were permitted to operate
their stores so long as they continued to pay post-petition rent. But debtors
could not pay outstanding pre-petition rent until the bankruptcy court approved
the debtor's request to assume its leases. Consequently, before the act,
landlords often were forced to wait lengthy periods of time before learning
what would happen to their leases.
The act amends the Bankruptcy Code in three significant
ways. First, it increases a debtor's initial time period to decide whether to
assume or reject a commercial lease from 60 days to 120 days after the
Second, Congress placed an outside limit on extending the
120-day time period. The court may extend the 120-day period for up to 90 days
only on the motion of the debtor or the landlord. A bankruptcy court only may
issue such an extension prior to the expiration of the initial 120-day time
Third, and most important, the bankruptcy court must have
the landlord's prior written consent to grant an extension after the 120-day
period. Thus, a debtor/tenant's ability to extend the time period it has to
assume or reject commercial leases cannot exceed 210 days, or seven months,
from the bankruptcy filing without the landlord's consent.
The need for landlord approval past the 210-day limit on
extensions should give landlords additional leverage in bargaining with their
tenants in bankruptcy. Landlords can condition their consent to further
extensions upon the debtor providing more rent or some other lease concession,
which probably would require bankruptcy court approval. For example, landlords
may require debtors to waive the right to reject their leases and "go
dark" during the end-of-year holiday period in exchange for approval of an
Overall, these amendments should foster more substantive
negotiations among debtors, lessors, and potential purchasers at an earlier
point during bankruptcy proceedings. The amendments appear to favor landlords
more than debtors, as Congress has attempted to level the playing field for
landlords, particularly in national retail-chain bankruptcies.