Federal bankruptcy law uses special rules to treat the situation where a commercial landlord is faced with a bankruptcy filing by a tenant. Bankruptcy law does not treat the filing of a bankruptcy petition by a tenant as a default entitling the landlord to terminate the lease agreement, despite the fact that the lease may contain an ipso facto clause providing such. Ipso facto clauses are void under Title 11 (the “Bankruptcy Code”). Thus, a commercial landlord must maximize its available remedies to minimize its losses.
One remedy available to a landlord is an administrative priority claim under 11 U.S.C. §503(b), which is based upon the value provided by the landlord to the tenant-debtor’s bankruptcy estate.
While a landlord is entitled to rent while the bankruptcy case is pending under § 365(d)(3), until the tenant rejects or assumes the lease, or surrenders and vacates the property, this rent is an administrative expense or priority claim under § 503(b)(1)(A). Often, tenant-debtors will continue to pay administrative rent while it considers whether or not to reject or assume the lease. If the debtor accepts or assumes the lease, it must continue paying administrative rent during the bankruptcy case.
For a landlord to be entitled to a claim under §503(b), the debtor’s possession and/or use of the subject property must provide value to the estate. The fair market value of the premises as used by the debtor rather than the rental value provided in the lease is the amount that the landlord may claim under §503(b). The lease may charge $40.00/square foot, but if the property is used only for storage purposes, the administrative priority value may be worth only the warehouse rental rate of $15.00/square foot.
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