Bank Failures – What Happens if My Landlord Goes Bankrupt?

There have been a couple of bank failures recently, and some are uncomfortable signs that the banking system is under stress. Nothing too much more may happen, but attention to the ongoing trends is warranted. There is a connection between bank failures and commercial leasing only because most real estate properties are purchased with significant lender financing. As the banking system comes under increasing stress, one possible result is a liquidity crisis — that is, a drying up of the availability of commercial real estate loans. This can cause a commercial landlord to have cash flow and other problems paying existing loans.

The inability to refinance or find additional financing can cause a commercial landlord to be insolvent, which almost inevitably leads to a bankruptcy filing. If you are an NYC commercial tenant, a bankruptcy filing by your landlord may sound ominous. And, in truth, such is not to be considered “good,” although it could be if you want out of your lease. Generally speaking, though, a bankruptcy by your landlord might not significantly impact your business and tenancy as long as you pay careful attention to the bankruptcy process. Below is some basic information about what you should know if your NYC landlord files for bankruptcy.

What happens if my NYC commercial landlord goes bankrupt?

First, as with all bankruptcies, once a bankruptcy petition is filed, the owner of your commercial property ceases to be the owner (at least for a while). The “new owner” is the US Bankruptcy Court where the bankruptcy was filed, and all of the landlord’s assets — the “debtor” — are administered by an appointed Trustee. The second thing that happens is that you — the commercial tenant — will receive official notice of the bankruptcy. This is required because, as a commercial tenant, you have legal rights protected by the Bankruptcy Code. To protect those rights, paying close attention to bankruptcy proceedings is essential. You will probably need to hire a bankruptcy lawyer to attend hearings and file legal papers with the bankruptcy court.

Trustee’s Powers

For NYC commercial tenants in possession, the following key event is a decision by the Trustee about whether to “assume” the lease in question or to “reject” it. The Bankruptcy Code gives the Trustee this power.

It should be noted that before the decision is made, it is worthwhile for the tenant to communicate their desire. The Trustee is not bound by what the tenant wants, but it is relevant information for the Trustee to consider.

If, in a bank failure, the Trustee assumes the commercial lease, the lease continues in force with a couple of caveats. The tenant must continue to pay rent (as before), but the lessor’s obligations are nullified. Thus, if the lessor was obligated to pay monthly utilities, that obligation is abrogated. To remain in possession, the tenant must assume those obligations but can offset those payments against the rent due.

If the Trustee rejects the commercial lease, that means that the Trustee wants to terminate the lease. If the tenant also wants to surrender the space, then matters are mostly resolved to the satisfaction of both landlord and tenant. On the other hand, if the tenant wants to remain in possession and continue the lease, that is possible, but the tenant will need to hire an experienced bankruptcy attorney. The tenant must file papers with the bankruptcy court and closely watch the proceedings. The lessee remains in possession as long as the tenant pays rent (and satisfies all the other lease obligations). The tenant maintains its rights until the bankruptcy court says otherwise. Each time the Trustee asks the court to terminate the lease, the tenant must be there to object.

Additional caution: check your lease

The above is a bare-bones description of the process and options for tenants when their commercial landlord files for bankruptcy, whether due to a bank failure or otherwise. But a significant caution is in order: read your lease. Many commercial leases have bankruptcy-related provisions, and they may control how the bankruptcy process unfolds.

Contact the NYC Commercial Lease Negotiators at Wright Law Firm NYC Today

For more information, call the experienced New York commercial lease and real estate attorneys at Wright Law Firm NYC. We provide top-tier commercial real estate legal and legal services for the NYC business community. To schedule a consultation, contact our office by e-mail or call us at (212) 619-1500.