What Happens When Your Tenant Files for Bankruptcy?
You have a good tenant, paying rent in your commercial building on a regular basis. Then it happens—you get notified that your tenant is filing for bankruptcy. What will happen? Will you ever get paid? Can you evict the tenant?
First, once you are served with the notice of the bankruptcy, you must immediately stop collecting any money from the tenant, including regular rent, even if the tenant is not behind on rent payment. You cannot make any attempt to collect any money from the tenant, for any reason.
You also cannot modify or alter the lease under any provision that “punishes” the tenant in case the tenant files for bankruptcy (for example, a provision that says that the lease is terminated if the tenant files for bankruptcy).
However, the law does require the tenant to continue paying rent, or fulfilling the terms of the lease, when the bankruptcy is filed, unless there is “cause” for the tenant not to perform. Remember that if the tenant does not pay rent, or perform under the lease, they must be removed through the bankruptcy court–you should not take your own steps to evict the tenant, or file an action in state court.
Assume or Reject the Lease
The tenant is usually given the option to assume or reject the lease. That means the tenant can just walk away from the lease—however, if it does, the tenant has to leave the property, freeing you to rent it out again. Additionally, this post-filing rejection can be treated as a breach of the lease, allowing the landlord to whatever remedies would be payable under the lease (but subject to a cap, established by the Bankruptcy Code). But because those damages get low priority they may not be paid at 100%–or at all—by the time the bankruptcy is over.
If the tenant accepts the lease, nothing happens—your lease and its terms will continue as is.
The tenant can also assign the lease—meaning, a third party takes over the terms of the lease (even if the terms of the lease itself would otherwise restrict assignment). This often happens when the tenant can’t afford the lease, but if the terms of the lease are pretty favorable, it is likely someone out there would like a lease under those terms. Of course, you as the landlord may have little say over who is taking over the lease (unless you hire a bankruptcy attorney, and challenge the assignment in court).
You can demand that whoever assumes the lease, is financially solvent, and able to meet the terms of the lease the same way your tenant was when the lease was entered into.
Of course, given that all or nothing choice that the law provides, many landlords and tenants opt to negotiate a middle ground, allowing the original tenant to remain, under modified lease terms.