Updates in the Law
Due to the COVID 19 virus and related rules and guidelines regarding social distancing, many commercial tenants will have difficulty making payments on commercial leases and otherwise complying with their lease obligations. This may cause a substantial number of commercial tenants to file for Chapter 11 bankruptcy. To prepare for this potential, commercial landlords should be aware of the following:
Note that commercial tenants who file Subchapter V Chapter 11 petitions in bankruptcy for small businesses are required to file a Plan within 90 days of the bankruptcy filing, so the decision of whether to assume or reject a lease will typically be made by the time the Plan is filed.
Certain exceptions may apply to defeat preferential transfer claims, including an exception for payments made in the ordinary course of business or for payments made in exchange for “new value” provided by the landlord, such as when the landlord allows the tenant to remain in possession of the leased property.
If a Chapter 11 tenant assumes a commercial lease in bankruptcy, there is no cause of action for preferential payments.
– Applying the security deposit to unpaid obligations as allowed by the lease;
– Requiring an increase in the security deposit;
– Requiring a Letter of Credit;
– Requiring a surety bond; or
– Requiring personal or third-party guaranties.
While there is some risk that an increase of a security deposit may be challenged as a preferential transfer if it occurs during the 90 day period before the tenant’s bankruptcy, a landlord may be able to defeat such a claim if the landlord provided “new value” to the tenant as noted above. It would be advisable to consult with legal counsel before taking this action.