January 27, 2003

Potential Bankruptcy Law Changes Could Impact Commercial Property Owners

4 min

BOMA International.org

Although Congress failed to pass the Bankruptcy Abuse Prevention and Consumer Protection Act of 2002 (H.R. 333) during the past congressional session, some lawmakers are optimistic that bankruptcy reform legislation will be reintroduced and passed by Congress in 2003.

Commercial landlords should be aware that the bankruptcy reform legislation likely to be reintroduced in Congress would affect their rights. The focus of media attention has been thus far mostly on the impact such legislation would have on consumer bankruptcy cases and credit card companies.

However, the legislation contains several provisions that, if adopted, would have a favorable impact on landlord rights against bankrupt tenants.

The following summary of the highlights of proposed changes to the United States Bankruptcy Code provides an advance look at how this legislation may affect commercial landlords.

Deadline by Which Commercial Leases Must be Assumed or Rejected

Current Law – If the tenant does not assume or reject a commercial lease within 60 days after the bankruptcy filing, the lease is deemed rejected and the tenant must surrender the property to the landlord. The 60-day period, however, is often extended multiple times by the Court, which can result in years of uncertainty for the landlord.

Proposed Revision – The tenant must decide whether to assume or reject the lease within 120 days after the bankruptcy filing. If the tenant gives a good reason, the Court may grant one 90-day extension of time. Any further extensions of time will require the written approval of the landlord.

Strict Compliance With Use Clauses and Other Lease ProvisionsU – Courts will sometimes ignore certain lease provisions, such as "use clauses," in order to allow a tenant to assign a lease to a new tenant that will operate in violation of such provisions.

Proposed Revision – The proposed revision makes it clear that if a lease is assigned, the lease will retain all of its provisions and restrictions. Therefore, for example, assignment of a shopping center lease will be subject to all of its provisions, including "use clauses."

Damages Resulting From Leases That Are Assumed and Then Rejected

Current Law – If the tenant assumes a commercial lease after the bankruptcy filing and then subsequently rejects it, the landlord has a top-priority claim for the amount of rent owed by the tenant for the entire remaining term of the lease.

Proposed Revision – The landlord’s top-priority claim is limited to the amount of two years’ rent. Any remaining sums due for the balance of the term of the lease are treated as a general unsecured claim and will likely be limited to one year’s rent. This proposed revision favors the tenant because the current law gives the landlord a top-priority claim for rent owed by the tenant for the entire remaining term of the lease, while the revision would limit such priority to two years’ worth of rent.

Curing Lease Defaults as a Condition to Assumption of the Lease

Current Law – In order to assume a commercial lease after the bankruptcy filing the tenant must, among other things, cure all defaults under the lease. Therefore, if the tenant is in default under the lease for failure to operate for a period of time before the bankruptcy filing, the tenant would not be able to assume the lease because it would be impossible to go back in time and cure such default.

Proposed Revision – Upon assumption, the tenant would not have to cure defaults that relate to non-monetary obligations, such as continuous operation provisions, if it is impossible to do so because such defaults occurred in the past. The tenant would, however, have to resume operations upon assumption of the lease and pay the landlord for damages as a result of the failure to operate. If the landlord’s goal is to lease the property to a new tenant, this revision will favor the current tenant/debtor because it will allow the tenant to assume the lease despite the fact that there was a prior lease default that cannot be cured. Conversely, if the landlord’s goal is to continue leasing to the tenant, this revision will favor the landlord because it will permit the tenant to assume the lease despite the prior incurable lease default.

BOMA International will track this potential legislation during the upcoming Congressional session and keep members apprised of any developments affecting their interest.

David E. Rice is the administrative partner in the bankruptcy and creditors’ rights practice group at Venable, Baetjer and Howard, LLP.