NEW LANDLORD PROTECTIONS – COVID BANKRUPTCY FILINGS BY TENANTS
NEW LANDLORD PROTECTIONS – COVID BANKRUPTCY FILINGS BY TENANTS
The newly enacted Consolidated Appropriations Act, 2021 (“CAP”) makes several amendments to the Bankruptcy Code based upon the severe financial hardships suffered by both tenant debtors and landlords as a result of the COVID-19 pandemic. The amendments relate to the deferral of rent by small business debtors, the period of time to assume, assume and assign, or reject a nonresidential real property lease, and preferential transfers. All of the amendments will sunset on December 27, 2022, but until then landlords should take heed.
Preferential Transfer Protection
Landlords who entered into lease amendments with tenants after March 13, 2020, to allow the tenant to defer the payment of rent would have been subject to preference actions in case of a tenant bankruptcy, because of the payment of rent outside the ordinary course of business. But now, those landlords are protected from claims of preferential transfers. A preferential transfer action seeks to claw back from the payment recipient (landlord), payments made by a debtor within 90 days of a bankruptcy filing and outside the ordinary course of business. The CAP temporarily amends the bankruptcy code section dealing with preferences and creates an exemption from preference liability to encourage landlord rent deferral agreements.
Rent Deferrals for Small Business Debtors
The CAP also provides that a small business debtor (commercial debtors having non-contingent, liquidated debts under $7.5 million) may defer rent coming due in the first 120 days of the bankruptcy case. However, that business debtor must demonstrate that the cause is from material financial hardship due, directly or indirectly, from the COVID-19 pandemic.
More Time to Assume or Reject Leases
The CAP also changes the deadlines to allow additional time for a Chapter 11 debtor to assume, assume and assign, or reject its nonresidential real property leases. Previously, a debtor had an initial 120-day period, plus one additional 90-day possible extension to assume or reject the lease. Additional extensions beyond the 210th day of the case require the landlord’s prior written consent. But now, that time frame increased the initial period from 120 days to 210 days, allowing the single 90-day extension provision, with the landlord written consent requirement. The debtor must timely perform all of its obligations under the lease during that time. And to the extent the debtor does not perform, landlords retain the ability to either compel the debtor’s performance in bankruptcy court or seek relief from the automatic stay to go back to state court and pursue an unlawful detainer case.
For more information feel free to contact Dawn: dcoulson@eppscoulson.com.
EPPS & COULSON, LLP
Attorneys admitted to practice in
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Information contained in this Memo is intended for informational and educational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney. While intended as informational and educational, it is considered advertising under laws of some states. Epps & Coulson, LLP encourages you to call us to discuss these matters as they apply to you or your business.