Tenant Rights When Landlord BKs

Tenant Rights in BK

Tenant Rights in Bankruptcy

Posted by Lee Sterling – San Diego, CA

General Growth, the owner or manager of more than 200 malls in 44 states, which also owns office buildings and is involved  in the management and development of master planned communities, filed the LARGEST real estate bankruptcy in U.S.  history. So, what happens to its thousands of tenants in those malls and office buildings?

The bankruptcy code (Code) allows the debtor-in-possession (the landlord, for example) or the trustee of the bankrupt estate (hereinafter we’ll use Trustee to indicate either) to accept or reject executory contracts and unexpired leases (Sec. 365).

As a result, the Trustee will usually affirm leases that are at or above market rent and reject those that are below market rent. Of course, the lessee of a below market rent would like to make sure it continues to have the right to occupy that space, and the lessee may want to retain the space even if it’s at market rent because of significant improvements the lessee may have made or the cost of moving may be prohibitive.

Fortunately, if the lease is rejected, Section 365 provides that the lessee’s possessory rights are protected. However, the Trustee may be relieved of other provisions of the lease, such as the duty to provide services to the lessee.

What if the Trustee wants to sell the property that you have leased?Section 363 of the Code allows the Trustee to sell the real property “free and clear” of any “interest,” in the property, and a lease has been held to be an “interest.”

One case, in the Seventh Judicial Circuit, with its particular facts, has held that the right of the Trustee to sell the property free and clear of the lease under 363 of the Code trumps the rights under section 365 of the Code that gives the lessee the continued right to possession. The lessee, for some reason, had not objected to the sale; perhaps counting on the provisions of Section 365.

The lessee lost the possessory rights to a warehouse they had built on the bankrupt’s property. In the First Circuit, in a different case, where the lessee had objected to the sale, the Court held that the lessee’s right to retain possession was not trumped by Section 363! If you’d like more information, an interesting discussion of the cases can be found at: https://is.gd/u8Sm and https://is.gd/u8qA.

As soon as you hear that your landlord has filed bankruptcy or is contemplating filing bankruptcy, contact competent bankruptcy counsel!

About the Author. Lee Sterling, a guest Analyst and Author for CommercialWebPage.com, is a retired Colorado real estate lawyer. He now lives in the San Diego, California area and is a real estate Broker working with commercial tenants to help them find space, buy buildings, negotiate and renegotiate leases. He can be reached at 760-230-1492 or at Lee@LeeSterling.com.

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