Retail Commercial Leases in Chapter 11 Small Business Cases
If you run a small business in the Tampa Bay area and are considering Chapter 11 bankruptcy, we know that you have many questions about moving forward with your business. For instance, can you keep your business open throughout Chapter 11 bankruptcy? Will any of your business assets need to be liquidated? And perhaps most pressingly, if you can keep your business open, what do you need to do with regard to your retail commercial lease?
At Samantha L. Dammer, we are committed to assisting small business owners in Tampa who have questions about Chapter 11 bankruptcy. For small business owners, we want to make sure you understand your rights and responsibilities when it comes to commercial retail leases and Chapter 11 bankruptcy, as well as the rights and responsibilities of property owners who are leasing the space.
Retail Commercial Space Occupants: Do You Have a Lease or a Mortgage?
The first question in determining a small business owner’s rights with regard to retail commercial space in a Chapter 11 bankruptcy case concerns whether the small business owner is occupying the space as an owner or as a tenant. In situations where the small business owner does not actually have a lease but is instead occupying the property under the terms of a mortgage, then the matter is governed by Section 506 and Section 1129 of the Bankruptcy Code. The small business owner is permitted to keep the property as long as she or he pays the current property value. If the small business owner does not want to retain the property, then the mortgage holder can seek an unsecured claim that is equal to the different between what the small business owner owes on the mortgage and the current property value.
But in most cases where a small business owner has questions about a retail commercial lease and Chapter 11 bankruptcy, that small business owner actually has a lease (and not a mortgage). In other words, the small business owner is a tenant under the terms of a commercial property lease. The way in which the bankruptcy will affect the lease depends upon whether the small business owner wants to remain in the property or not. If there are plans to keep the business open through the Chapter 11 bankruptcy, then the business owner will need to do something called “assuming” the lease under Section 365 of the Bankruptcy Code.
What Does it Mean to Assume a Lease?
As we mentioned above, a Tampa Bay small business owner who is planning to file for Chapter 11 bankruptcy but wants to retain a retail commercial lease will need to “assume” the lease. This means that the small business owner must do three things:
- Repay previous defaults on the retail commercial lease that existed prior to the Chapter 11 bankruptcy filing;
- Continue to make regular payments on the retail commercial lease during the Chapter 11 bankruptcy proceedings; and
- Provide adequate assurance that future lease payments will be made.
If the small business owner cannot do these things, then it may be impossible to retain the retail commercial space and the terms of the commercial lease. What if the small business owner does not want to remain a tenant under the terms of the retail commercial lease?
When a debtor who files for Chapter 11 bankruptcy is a tenant under a commercial lease but wants to get out of the lease in the bankruptcy proceeding, then a different section of the Bankruptcy Code governs the matter. This is known as “rejecting” (as opposed to “assuming”) the lease. Under Section 502 of the Bankruptcy Code, the landlord can seek an unsecured claim from the small business owner for all or part of the unpaid balance on the lease.
Contact a Tampa Chapter 11 Bankruptcy Lawyer
Chapter 11 bankruptcy is complex, and it is important to work with a Tampa bankruptcy attorney on your case. Contact Samantha L. Dammer to get started on your case and to learn more about how bankruptcy will impact your retail commercial lease.