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How lease assumptions can benefit businesses during bankruptcy

On Behalf of | Nov 2, 2023 | Business Bankruptcy

Businesses with multiple locations, including restaurants and retail establishments, often face a lot of challenges during bankruptcy. They have many financial obligations that can lead to creditor challenges and complicate the process of obtaining a discharge.

Particularly if a company hopes to continue operating after bankruptcy, it needs to approach the process judiciously and with a focus on minimizing operational expenses. The leases for individual retail or restaurant locations are often among the most expensive financial obligations that a business is compelled to grapple with as it seeks debt relief.

What happens to a lease during bankruptcy?

As executory contracts, commercial leases are eligible for one of several solutions during bankruptcy proceedings. Companies can reaffirm the lease or seek to renegotiate the terms with the landlord. They can ask to terminate the lease, which may then lead to the landlord seeking reimbursement, when possible, for the rent owed during the remainder of the lease. The third option is that they can assign the lease to others. A lease assignment effectively means having a new commercial tenant take over a company’s space. How might lease assignment benefit those managing a complex business bankruptcy?

Lease assignment ends continued obligations

A lease assignment essentially means that the landlord can continue getting rent, but they will receive it from a new tenant. A company that is able to locate a new tenant can drastically reduce the financial inconvenience to the landlord when it files for bankruptcy. There may be very few or no missed months of rental income. The tenant undergoing bankruptcy will be able to eliminate a major financial liability that may have persisted for multiple years or added up to tens of thousands of dollars. The successful assignment of a lease could also prevent the inclusion of rent-related debts in the bankruptcy process.

Lease assignment can therefore diminish future landlords’ aversions to working with that commercial tenant because they have not left a landlord with an empty unit and no way to recoup the losses generated by the company’s sudden insolvency. Many businesses find that negotiating a lease assignment can be a challenging process, particularly when a tenant occupies a relatively large space or has made substantial changes to existing facilities.

Exploring every option for handling obligations like executory contracts, including leases, can make a big difference for organizations seeking to reduce financial burdens through a business bankruptcy filing.