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What effect will a tenant’s bankruptcy have on your lease?

On Behalf of | Oct 10, 2022 | Property Law

Signing a commercial lease with a new tenant usually means that you can look forward to several years of payments, as well as traffic to the property that might eventually attract new tenants. The business renting your property will not only pay for the space that the company occupies but may also contribute toward the maintenance of common areas, like bathrooms and parking lots, used by all of your tenants.

Unfortunately, a significant portion of businesses will fail in their first few years of operations, even if the person running the business seems competent and the business plan seems solid. If one of your commercial tenants files for bankruptcy, what will that mean for your lease?

They can potentially terminate the lease

In a business bankruptcy, the owner or executive making the decisions on behalf of the company will have to make difficult choices. If the business is closing or streamlining its operations, it may no longer be able to meet the rent payment obligations created by your lease.

Federal bankruptcy code does allow for businesses to end their leases or other ongoing contractual obligations as part of a bankruptcy filing. They may also be able to reassign the lease, which would involve them cooperating with you to move a new tenant into the space.

If the bankruptcy is successful, the discharge that results may eliminate some or all of the past-due rent obligations owed by the commercial tenant as well.

Cooperation could be an option

For many businesses, falling behind on a lease and the prospect of eviction is one of the concerns that will push them toward a bankruptcy filing. You may be able to negotiate an arrangement with the tenant that deters them from filing for bankruptcy and helps you collect on the rent they still owe.

In some scenarios, you could go to court to ask the courts to exclude your debts from discharge in bankruptcy or to allow to you make a claim against the business owner’s income or assets instead of against the company itself.

Learning more about your rights as a commercial landlord with a tenant considering commercial bankruptcy will protect you from the worst losses possible from a tenant that has fallen significantly behind on their obligations.