Commercial landlords often sign leases with business tenants that last for multiple years. Provided that the business succeeds, the landlord may have a predictable stream of income. Unfortunately, many new businesses and small companies can fail with little warning. Other times, the owners or executives operating struggling businesses have to take drastic steps to protect the company during times of economic hardship.
If a commercial tenant files for bankruptcy, landlords may have a few options available to them. Considering every possible solution can help those who own commercial properties minimize the harm caused by the bankruptcy of a tenant. The following are some of the most common solutions when a business renting commercial space files for bankruptcy.
Reaffirming the lease
Tenants subject to executory contracts while navigating business bankruptcy have several options available. They can choose to reaffirm the lease and remain in the space despite pursuing bankruptcy relief. Landlords may want to consider working with tenants who attempt to eliminate other financial obligations and hope to retain the same commercial space. Certain lease concessions, such as allowing the tenant to cover missed payments over an extended period, might help a business tenant overcome temporary financial struggles and resume paying rent on time as the lease requires.
Terminating the lease
Bankruptcy is one of the scenarios in which a business tenant can theoretically terminate a lease early. Particularly in scenarios where the tenant intends to close down the business entirely or cease operating in multiple locations while only retaining one flagship location, allowing them to terminate the lease might be the best solution available. The landlord might be able to negotiate an arrangement that allows for the repayment of any missed payments during the tenancy. They can also start looking for a new tenant to occupy the space.
Allowing a lease assignment
Sometimes, the tenant intends to leave the space, but there are many months left on the lease. It may be possible for the tenant to handle much of the legwork necessary to find a new business tenant. Lease assignment can be a mutually beneficial solution when a commercial tenant files for bankruptcy and no longer wishes to make use of a commercial space. Of course, landlords may need to impose certain limitations on lease assignment for their protection.
The terms of the lease, the nature of the issues facing the tenant and the demand for units in the area can all influence the best way for a commercial landlord to minimize their losses when a tenant files for bankruptcy. Understanding the options available and preparing for the possibility of complex litigation if necessary can help landlords defray the hardship that a non-paying tenant can cause.