Chapter 11 Bankruptcies and Commercial Leases in Shopping Centers

Shopping centers in the Tampa Bay area house many different types of businesses, from restaurants and bars to retail establishments. When a business in a Tampa Bay shopping center files for Chapter 11 bankruptcy, there are numerous issues that both the business owner and the commercial landlord will need to consider. While the business likely will be focused on creating a repayment plan and moving through the bankruptcy, the commercial landlord likely will be considering different issues. Most significantly, the commercial landlord may learn about the bankruptcy case and become concerned about its ability to obtain rent payments from the commercial tenant.

What are a business’s rights and responsibilities in a Tampa Bay Chapter 11 bankruptcy case with regard to the commercial landlord? And what is a commercial tenant permitted to do—and not to do—in connection with a Chapter 11 bankruptcy filing?

Commercial Leases in a Chapter 11 Bankruptcy: Is the Business Required to Pay Commercial Rent After Filing?

One of the first and most important issues to arise when a commercial tenant in a Tampa Bay shopping center files for Chapter 11 bankruptcy is the matter of the commercial lease. In most situations, the commercial landlord is extremely concerned about being paid rent for the commercial space, and whether the lease agreement in existence with the tenant will continue to function as a valid agreement between the two parties.

The U.S. Bankruptcy Code (§ 365) governs most issues related to consumer rent and consumer leases in a Chapter 11 bankruptcy case. Under this section of the U.S. Bankruptcy Code, a commercial debtor has an obligation to pay rent for the commercial space it is renting. The law specifies that a debtor (the business owner and commercial tenant) must “timely perform all obligations of the debtor” related to an unexpired commercial lease agreement within 60 days from the date the debtor files for Chapter 11 bankruptcy. This means that the debtor is required to pay rent for the commercial shopping center space after it files for bankruptcy.

Assumption of the Lease Versus Rejection of the Lease

The next major matter involving unexpired commercial leases in a Chapter 11 bankruptcy case is the issue of “assumption” versus “rejection” of the lease. Under the U.S. Bankruptcy Code, commercial tenants that have filed for Chapter 11 bankruptcy typically have the option to “assume” or “reject” the commercial lease. If the business wants to remain in the shopping center and keep the commercial lease, then it would assume the lease. If it does not want to do so, it would reject the lease.  A debtor must “promptly cure” the pre-filing arrearages if it wishes to assume the lease, but the law is not clear on what constitutes a prompt cure.

In most Chapter 11 bankruptcy cases, a commercial tenant has up until the point that its repayment plan is confirmed to assume or reject the lease (although the commercial landlord may be able to force the issue earlier by filing a motion requesting either an assumption or rejection of the lease prior to the date that the plan is confirmed).

For most commercial landlords, it is much better if the business assumes the lease. Then, the business is making a promise to pay its rent in full for the remainder of the lease term, even if the repayment plan does not involve all other creditors being repaid in full. The court must authorize the assumption of the lease, and the business will then be required to pay the commercial tenant anything is currently owes in back-rent or fees. Yet the Bankruptcy Code also allows a debtor to reject the lease, which will then allow the commercial landlord to have a claim in the Chapter 11 case.

Shopping Center Leases Under Section 365(b)(3)

Section 265(b)(3) of the U.S. Bankruptcy Code has special rules concerning shopping center leases. Under this section of the U.S. Bankruptcy Code, there are particular protections for “a lease of real property in a shopping center” when the debtor either assumes the lease or assumes the lease but then assigns the lease to a third party. The U.S. Bankruptcy Code provides a landlord with assurances about, for instance, the source of rent, as well as terms concerning the assumption or assignment of the lease based on the tenant mix or balance in a shopping center. In other words, a debtor tenant cannot simply assume and then assign a lease to any client at all without regard for the tenant mix or balance of the shopping center.

How is a shopping center defined for purposes of this section of the U.S. Bankruptcy Code? In the legislative history of the statute, a shopping center is defined as “a carefully planned enterprise, and though it consists of numerous individual tenants, the center is planned as a single unit, often subject to a master lease or financing agreement.”

Learn More from a Tampa Bankruptcy Lawyer

If you have questions about a business debtor’s rights and obligations with regard to commercial leases under the U.S. Bankruptcy Code in Chapter 11 cases, an experienced Tampa Chapter 11 bankruptcy attorney can assist you. Contact Samantha L. Dammer for more information.

Resources:

law.cornell.edu/uscode/text/11/365

uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title11-section365&num=0&edition=prelim

https://www.tampalawadvocates.com/changing-attorneys-in-a-chapter-11-case/