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Navigating Bankruptcy Law for a Landlord Requires Finesse, Tenacity, and Plenty of Rolaids
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Navigating Bankruptcy Law for a Landlord Requires Finesse, Tenacity, and Plenty of Rolaids

The trickle-down effects of the recession on the real estate market in general have not yet subsided, and landlords continue to find surprises in the mail:  Notices of tenants’ bankruptcy filings.

Under bankruptcy rules, debtors may selectively elect to assume or reject any executory contracts or unexpired leases under which they may be obligated, subject to bankruptcy court approval.  Lease rejection in bankruptcy amounts to a breach of the lease, and the landlord’s claim is treated as a prepetition unsecured, non-priority claim.

In a lease rejection scenario, a commercial property owner must calculate the monetary damages he expects to incur and then figure out to what extent his damages may be limited by bankruptcy rules.  This is not an easy task for an untrained professional, and a property owner is certainly cautioned to seek competent legal advice from an attorney familiar with Section 502(b)(6) of the Bankruptcy Code.

A thorough understanding of Section 502(b)(6) is vital because it governs the cap on damages that a landlord may recover when a debtor properly rejects a lease.  Proper application of 502(b)(6) can be worth thousands of dollars to a landlord.

Once the initial damages claim is calculated on behalf of the landlord[1], the landlord must file a claim against the bankrupt estate.  At that point, either the debtor or another creditor will have an opportunity to object to the claim.  If an objection is made, then Section 502(b)(6) imposes a cap on the landlord’s claim.  Under the law, the landlord may not recover an amount exceeding of the sum of  “(A) the rent reserved [under the] lease, without acceleration, for the greater of one year or 15 percent, not to exceed three years, of the remaining term” of the lease, and “(B) any unpaid rent due under” the lease.  The triggering date for both clauses is the earlier of (1) the date the tenant filed bankruptcy, or (2) the date the landlord regains possession of the premises.

Sounds easy, right?  This is where the Rolaids might come in handy.

The policy basis for statutorily limiting a landlord’s claim is an attempt to balance competing interests — compensating a landlord for his losses, while limiting his claim of future losses in deference to other unsecured creditors.

If you are a landlord whose tenant seeks to reject the lease in bankruptcy, be certain you are fully informed of these and other nuances of the Bankruptcy Code.  The attorneys at Glass & Goldberg are committed to protecting your rights before, during, and after a bankruptcy proceeding. 

Glass & Goldberg provides high quality and cost-effective legal services and advice for clients in all aspects of business litigation and transactional law.  Call us at (818) 888-2220, email us at info@glassgoldberg.com, or visit us on the web at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

[1] Generally, the landlord’s initial damages are calculated under the appropriate state law governing the lease contract.  In California, a landlord is entitled to recover past unpaid rent up to the time of the breach, plus the present value of the amount by which the future unpaid rent cannot be offset by a new tenant.  (The tenant bears the burden of proving the landlord could reasonably mitigate his future damages.)

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