Recently, Clark & Trevithick addressed some of the issues that commercial landlords face when a tenant files for bankruptcy. This week, we will talk about how a commercial landlord may strengthen its right to payment out of the bankruptcy.
Know where you are on the list of priorities
In bankruptcy cases, creditors are paid pursuant to a schedule of priority that is set forth in the Bankruptcy Code. Generally, creditors are paid in the following order:
First, unpaid United States Bankruptcy Court fees are paid.
Second, secured creditors, such the debtor’s mortgage holder are paid.
Third, priority unsecured creditors, such as child support or alimony, taxes, and administrative claims are paid.
Fourth, unsecured creditors, which is everyone else are paid.
Unpaid rent due and owing before the bankruptcy filing is an unsecured claim. Being an unsecured creditor is an unenviable position because not only are there higher priority claims that are paid first, but there is typically a large pool of unsecured creditors who are paid only their pro-rata share of whatever cash is left in the bankruptcy estate. However, if the debtor in bankruptcy remains in possession of the nonresidential leased premises, there are two potential ways for a commercial landlord to claim an administrative claim for unpaid rent incurred after the tenant’s bankruptcy case is filed.
While waiting for the lease to be assumed or rejected, your claim is an administrative claim
As discussed in the prior clarktalkblog article Commercial Landlords – Don’t Fear Tenant Bankruptcies!, leases of nonresidential real property must be assumed or rejected. Until the lease is assumed or rejected, the tenant’s obligations under the lease must be performed. As a result, if the debtor fails to pay rent on nonresidential real property that is incurred after the bankruptcy case is filed, the landlord can claim that the unpaid rent is an administrative claim until the lease is rejected. The lease does not need to provide a benefit to the bankruptcy estate. However, if the lease is rejected, the landlord has an unsecured claim dating back to the date the bankruptcy case was filed. The security deposit can be an offset to rent that was unpaid prior to the bankruptcy case, but is not an offset for administrative claims.
A creditor who provides a benefit to the bankruptcy estate has an administrative claim
A creditor has the right to assert an administrative claim for the actual and necessary costs and expenses in preserving bankruptcy estate assets. Although this alternative path is not specific to rent, there is an argument that the debtor’s post-bankruptcy use of leased nonresidential property forms the basis for a claim that the rent is an allowable administrative expense, so long as the debtor’s use of the leased property confers a benefit to the estate. For example, if the debtor remains in possession of a warehouse that contains estate assets, a landlord may argue that the unpaid rent confers a benefit to the estate by preserving estate assets, justifying an administrative claim for the post-bankruptcy rent.
Facts matter and so does prompt action
While no landlord wants a bankrupt tenant, commercial landlords may have arguments to strengthen their claim. Upon being given notice of a tenant’s bankruptcy filing, the landlord should act promptly to evaluate the facts and identify options for strengthening its position in the case.
Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum. Please note that views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog. If you have any questions about how a commercial landlord may strengthen its right to payment out of the bankruptcy, please feel free to contact Stephen Hyam at shyam@ClarkTrev.com or telephonically at (213) 629-5700.