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What happens to a commercial lease in a business bankruptcy?

On Behalf of | Apr 1, 2022 | Business Bankruptcy

Business bankruptcy can be an opportunity to reduce expenses and preserve the business from possible failure. It can also be a step in the process of closing the company and liquidating its assets. The company can temporarily halt collection activity and present a plan to the courts, possibly ending with a discharge of the debts it cannot repay.

Whether you hope to leave behind a failed company’s financial obligations or address issues that have caused your business’s financial insolvency, bankruptcy can be a powerful tool. You can eliminate certain expenses and free up revenue to pay the most important costs, like staff wages.

One of the largest regular expenses your company likely has to pay is its commercial lease. Whether you have a retail space or an industrial facility, what you pay to rent that space could represent a significant portion of your monthly operating costs. What happens with your lease in a business bankruptcy? 

Your rent obligations don’t just disappear

Bankruptcy does not just erase your financial responsibilities. It can lead to a discharge of your unsecured debts after you meet certain requirements, but you will still have to fulfill other obligations.

Your lease may involve debt if you have missed payments and may also involve future obligations. As an executory contract, your commercial lease is subject to specific rules in bankruptcy. You have to decide if you want to end your lease, assign it to someone else or reaffirm and retain it. Depending on which solution you choose, you may be able to negotiate with your landlord regarding any past due amount.

If you want to end the lease or assign it to someone else, you will need to notify them in a timely manner. If you want to stay there, communication will be necessary.

You may be able to renegotiate the lease

You may need to negotiate certain arrangements if you hope to stay in the property as part of a reorganization bankruptcy. If your landlord would have a hard time finding a new tenant for the property, they may want to work with you to keep you in business and paying rent. You may be in a good position to renegotiate certain aspects of your lease as part of a Chapter 11 business bankruptcy.