Will Declaring Bankruptcy Terminate a Commercial Lease?

If you declare bankruptcy, you can terminate your commercial lease by rejecting the lease under Section 365(b) of the bankruptcy Code. You are allowed to occupy the property for 60 days from filing your bankruptcy petition, unless extended by the court, to decide whether to assume the lease, assign it or reject it. You have 120 days from the date you file your bankruptcy petition to either agree to assume your lease or reject it.

Liabilities

You may still be liable to your landlord for any early lease termination damages. However, your damages are subject to acap rate of no more than 15% of the value of your unexpired lease termfor a periodnot exceeding more than three year's rent. You could be subject to owing administrative rent if you remain on the premises after your lease expires.Rent due after the expiration term of your lease or after rejection is calculated at the property's reasonable rental value. That amount is usually stated in your lease. Your lease will be considered unsecured debt. Inbankruptcy, secured debt is paid first after the sale of the company's assets. Unsecured debt gets paid with whatever proceeds are left over from the sale of assets after secure debts have been paid. So your landlord may not get anything.If you are still occupying the premises after you file for bankruptcy, your landlord has what is referred to as a "priority administrative claim" for the rental value for that period and will be given preference over other unsecured creditors to recover damages. If there are any personal guarantees under your commercial lease, they are not eliminated under bankruptcy unless the guarantor files for bankruptcy. Also, the guarantor may not be eligible for the cap rate on any damages your landlord may have incurred as a result of your bankruptcy filing.

Rejecting or Assuming the Lease

If you are planning on keeping your business open, and you have a commercial lease that is below market, you may want to assume it though your Chapter 11 bankruptcy proceeding. Your landlord cannot cancel your lease just because you filed bankruptcy. If you are assuming the lease, you must pay past-due amounts or arrange to enter into a payment plan with your landlord. If you have a lease that is no longer advantageous to your business, you may want to reject it and move to a more affordable lease if you are filing a Chapter 11 reorganization. If you are filing a Chapter 7 liquidation bankruptcy and plan on going out of business, then the lease will automatically be considered rejected by the court.

Getting Legal Help

You should speak with a business bankruptcy attorney if you are thinking about filing Chapter 7 or Chapter 11 bankruptcy. The attorney can explain the bankruptcy laws and how they related to your lease. The attorney can represent you in court as well.