Navigating a Commercial Tenant's Bankruptcy: Effects of Lease Rejection, Caps on Damage Claims, Landlord Obligations

Recently, two significant distressed companies with thousands of commercial leases, Rite Aid and WeWork, each filed for Chapter 11 bankruptcy and have rejected a substantial portion of their lease portfolios. Given the current distressed commercial real estate market, there is a potential trend of tenants using the bankruptcy process to exit leases that do not contribute to their profitability. Counsel for landlords need to understand the key issues and considerations to help their clients navigate their options and obligations with regard to a tenant's bankruptcy and an unexpired lease.

The debtor, in the exercise of its business judgment, is given the power to assume (and then possibly assign) or reject unexpired commercial real estate leases, regardless of whether the governing leases include provisions that otherwise prohibit assignment or which would allow termination as a result of a Chapter 11 filing.

A landlord whose tenant rejects an unexpired lease in bankruptcy is left to assert a rejection damages claim. However, landlord damages claims are limited by a statutory cap, and in the absence of a security deposit, letter of credit, or other collateral securing the tenant's obligations, the landlord's damages claim is considered an unsecured claim, which likely means the claim will get wiped out.

Despite a tenant's bankruptcy filing, a landlord is obligated to continue performing under the lease until the debtor decides whether to assume or reject the lease, and the debtor must make its decision within 120 days of the bankruptcy filing (subject to a potential 90-day extension).

Listen as our authoritative panel discusses the key issues and considerations for landlords when a tenant files for bankruptcy and provides tips on what actions landlords can (and cannot) take during any formal proceeding to protect their interests.