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What landlords should know about bankruptcy lease assignment

On Behalf of | Jul 19, 2024 | Business Bankruptcy

Commercial landlords theoretically have a stable stream of income at their disposal. The typical commercial lease lasts for somewhere between two and five years. In many cases, some of the maintenance costs for the commercial facility pass directly to the tenant. If not, the landlord may charge fees for the services that they provide.

Unfortunately, business tenants are sometimes incapable of fulfilling lease obligations. Specifically, they might want to break the lease because the business has failed or become insolvent. Both those dissolving an organization and those downsizing a struggling business may want to end a commercial lease early. They may have more leverage to do so if they file for business bankruptcy. One of the possible solutions in a business bankruptcy scenario involves lease assignments. Under these circumstances, another party takes over the commercial lease.

How can landlords protect themselves in a lease assignment scenario involving tenant bankruptcy?

By entering a written agreement with the tenant

One of the simplest ways for a landlord to protect their interests in a lease assignment scenario is to carefully outline expectations for the tenant. There may be certain deadlines that they need to meet. The landlord may also require that the tenant include specific language or terminology in their attempts to advertise the lease opportunity to other business owners. Creating clear expectations for the conduct of the business tenant can help reduce some of the risk to the commercial landlord when a tenant wants to assign the lease to another business.

By evaluating new tenants carefully

One of the most common mistakes commercial landlords make during lease assignment is to let the tenant handle the entire process. They don’t care if the new tenant who takes over the commercial space has a history of defaulting on financial obligations or a weak business model. The landlord may need to do thorough due diligence to ensure that the party assuming the lease has the resources to pay and is likely to follow through on their obligations.

By learning about their rights

Landlords dealing with a tenant’s bankruptcy that affects a commercial lease do have certain rights. In some cases, they may have a right to claim reimbursement for missed rent payments and other costs. The exact rights and protections extended to the commercial landlord depend on the terms of the lease and the type of bankruptcy that the tenant initiated.

Discussing proposed lease assignments and any lease violations that previously occurred with a skilled legal team can help landlords decide how to respond to a rent issue with a tenant. Landlords who know their rights, and are proactive about protecting their resources, can potentially limit the losses incurred when a tenant files for bankruptcy.

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