COMMERCIAL RENT CLAIMS IN BANKRUPTCY
Sometimes a commercial tenant will file for relief in bankruptcy. Often that bankrupt tenant will return the premises back to the landlord either voluntarily or because of action taken by the landlord. The return of the premises usually allows the landlord to make a claim for damages against the tenant’s bankruptcy estate. The landlord can seek at least a part of the rent which would otherwise go unpaid because of early termination of the lease by filing a proof of claim form with the bankruptcy court.
The landlord can claim as damages the greater of one year of rent or 15 percent of the rent due over the remaining term of the lease, but not to exceed a total of three years of rent. The beginning point for calculating the future rent claim is the earlier of either the date that the tenant filed for relief in bankruptcy, the date that the landlord repossessed or the date that the tenant surrendered the premises back to the landlord. The landlord can also claim as damages all unpaid rent due as of the earlier of the petition date or the repossession or surrender date.
Not every charge included in a lease constitutes rent that can be claimed as damages. Rent has to be an obligation related to the value of the property that is fixed, regular or periodic.
The premature termination of a lease also imposes on a landlord an obligation to try to mitigate the damages or, in other words, to find a replacement tenant. If the landlord is successful in mitigating, as it usually is, the mitigated rent is applied to the future lease income stream prior to calculating the caps imposed by bankruptcy. The cap is not first calculated and then the mitigating factor taken off of the capped amount.
On the other hand, any security deposit held by the landlord must be applied to the capped amount.
Often a tenant that files for relief in bankruptcy will remain in and use the property for some period of time after filing until turning over the premises. That possession creates a separate claim, called an administrative rent claim, that can be recovered through a motion filed in the bankruptcy court. Yet the payment allowed as an administrative rent claim is not subtracted from the capped amount allowed for a damage claim. For an extreme example, assume that the debtor retained the property for a year before relinquishing it, and that the landlord was paid a year’s worth of administrative rent. The landlord could still claim from the tenant’s bankruptcy estate a year of rent damages or 15 percent of the remaining term of the lease not to exceed three years.
Case law and statutes change from time to time, often without notice, and often are specific to one jurisdiction only. The information herein is not intended to be, nor should it be considered, a substitute for legal or professional advice rendered by a competent attorney or other professional. If you have any questions about the application of issues raised here to your particular situation, seek the advice of a competent attorney or other professional.
Sometimes a commercial tenant will file for relief in bankruptcy. Often that bankrupt tenant will return the premises back to the landlord either voluntarily or because of action taken by the landlord. The return of the premises usually allows the landlord to make a claim for damages against the tenant’s bankruptcy estate. The landlord can seek at least a part of the rent which would otherwise go unpaid because of early termination of the lease by filing a proof of claim form with the bankruptcy court.
The landlord can claim as damages the greater of one year of rent or 15 percent of the rent due over the remaining term of the lease, but not to exceed a total of three years of rent. The beginning point for calculating the future rent claim is the earlier of either the date that the tenant filed for relief in bankruptcy, the date that the landlord repossessed or the date that the tenant surrendered the premises back to the landlord. The landlord can also claim as damages all unpaid rent due as of the earlier of the petition date or the repossession or surrender date.
Not every charge included in a lease constitutes rent that can be claimed as damages. Rent has to be an obligation related to the value of the property that is fixed, regular or periodic.
The premature termination of a lease also imposes on a landlord an obligation to try to mitigate the damages or, in other words, to find a replacement tenant. If the landlord is successful in mitigating, as it usually is, the mitigated rent is applied to the future lease income stream prior to calculating the caps imposed by bankruptcy. The cap is not first calculated and then the mitigating factor taken off of the capped amount.
On the other hand, any security deposit held by the landlord must be applied to the capped amount.
Often a tenant that files for relief in bankruptcy will remain in and use the property for some period of time after filing until turning over the premises. That possession creates a separate claim, called an administrative rent claim, that can be recovered through a motion filed in the bankruptcy court. Yet the payment allowed as an administrative rent claim is not subtracted from the capped amount allowed for a damage claim. For an extreme example, assume that the debtor retained the property for a year before relinquishing it, and that the landlord was paid a year’s worth of administrative rent. The landlord could still claim from the tenant’s bankruptcy estate a year of rent damages or 15 percent of the remaining term of the lease not to exceed three years.
Case law and statutes change from time to time, often without notice, and often are specific to one jurisdiction only. The information herein is not intended to be, nor should it be considered, a substitute for legal or professional advice rendered by a competent attorney or other professional. If you have any questions about the application of issues raised here to your particular situation, seek the advice of a competent attorney or other professional.