Landlords and Tenants in Bankruptcy
Tenants’ rights in bankruptcy?
What is that “Fresh Start”?
But what if the Tenant client wants to stay at the rental.. can they?
The answer to this question turns on whether the lease has expired. If the Lease has expired (for instance if an eviction has occurred), then unfortunately, the Tenant has no rights to stay. Further, the Tenant will have very little time to stay, since the Landlord has expedited rights in bankruptcy as to timing. Generally, if a tenant has defaulted on its lease, it is very difficult to stay unless the tenant is willing to immediately cure that default unless the Landlord agrees to alternative conditions.
If the debtor-tenant is current on its payments, then he or she can elect to stay or go, so long that they maintain normal rent payments if they wish to stay.
I represent Landlords and the Tenant filed bankruptcy. What are my client’s rights?
Assume or Reject
But What If My Landlord Files Bankruptcy?
Effectively in North Carolina, if the Lease has terminated, then the only benefit for filing bankruptcy is the discharge of any and all debt to the Landlord by “rejecting” the Lease. For Tenants facing accelerated balances, filing a Chapter 7 bankruptcy to relieve them from judgments and a debt-ridden future may be exactly what they need to get a fresh start.
While not specific with Tenant clients, bankruptcy, especially Chapter 7, offers debtors the opportunity to leave unsecured debt behind them. Tangible benefits are obvious: unsecured debts (credit cards, personal loans, medical debt) are relieved, judgments can be stripped from a debtor’s real property, lawsuits must cease, etc… Simply stated, Chapter 7 allows debtors to move on from the Landlord’s debt, as well as many other debts, at typically reasonable and affordable legal costs.
Typically, a Landlord is already fed up with a Tenant when they receive a notice of bankruptcy. The Tenant has been perpetually tardy or delinquent in payments, possibly caused damage to the premises, or has cost your client thousands of dollars in legal fees battling in state court. Well, the Bankruptcy Code and North Carolina law offers a bit of payback for your Landlord, however, it all turns on whether or not the Lease has been terminated or expired. Thus, depending on what Chapter the Debtor-Tenant files and if the Lease has expired, your client has several rights and timetables to observe.
After a bankruptcy is filed, a Debtor will have the ability to “assume” or “reject” any unexpired Lease. The terms “Assume” or “Reject” translate to “Reaffirm” and “Breach”, thus the Bankruptcy Code generally requires the Debtor to decide which they prefer. Thus, if the Debtor has not otherwise defaulted on the lease (i.e. unexpired), then he or she will have the right to continue to fulfill those lease terms despite filing bankruptcy.
When a Landlord files bankruptcy, many truths start to be revealed…. Often times, Tenants became somewhat disgruntled due to the realization that they had been paying rent, but the Debtor had not been paying mortgage. As a result of the failure to pay mortgage, the bank starts to foreclosure. The Tenants scream because they have been paying rent. As of a result, some tenants begin withholding rent, some continued to pay. What to do?
Despite the disfavor amongst the parties and the allure of saving rent, a Landlord filing bankruptcy provides the Tenant ZERO excuse to abate rent- especially in the context of a Chapter 11. The theory is that the Bankruptcy Court orders the Debtors to continue operations, which includes not only rent receipt, but ALSO bill paying (employees, taxes, operational expenses). When tenants abate rent, then the Debtor is left underfunded to meet those expenses and ultimately, the Debtor will be unable to have a successful Chapter 11.
Further, a tenant’s breach is a tenant’s breach, regardless of bankruptcy. The tenant’s breach allows the landlord those same remedies as it is afforded in state court. In fact, Tenants can be sued for damages for breaching the lease and failure to pay. So, the bottom line is that if a Landlord should file bankruptcy, your obligation to pay rent remains.
However, the Tenant is not done feeling the brunt of bankruptcy: the Landlord in Bankruptcy (as stated above) has the same rights as a Tenant filing bankruptcy: they can assume or reject leases. Thus, a bankrupt Landlord could easily (and often do) rejects several tenants’ leases and tell them to get out. Luckily, if the Tenant is current with the Lease and Landlord’s rejection is essentially a breach, then the Bankruptcy Code provides that the rejected Tenant can RETAIN its rights under the Lease for the balance of the term AND any extensions thereto.1 If the Tenant elects to stay, it must continue to make its rent payments and otherwise abide by those Lease terms.
Landlord and Tenancy law and the interaction in bankruptcy is complex and an experienced attorney should be sought. Arnold & Smith, PLLC has experienced attorneys in the field of creditor and debtor relations and can help navigate the process for you. If you would like to set up a consultation with one of the attorneys, please and not hesitate to contact us. We look forward to assisting you.