Nothing is more frightening to a landlord than to hear rumors that an important commercial tenant has or is about to file for bankruptcy.

When a tenant files for bankruptcy, the effect is to "freeze" its assets, including its rights under a lease. The leasehold is swallowed up as part of the "bankruptcy estate," cutting off the landlord's rights to use self-help to evict the debtor. Even if the landlord has a judgment against the tenant, the landlord cannot enforce it once the tenant files for bankruptcy. Once this happens, the landlord's remedies are limited to those provided under federal bankruptcy law.

There are several things you should do right away to protect your interests and keep your property from being tied up by the bankruptcy court:

  • Verify the rumor. Call the U.S. Bankruptcy Court clerk's office nearest you (usually in the state capital or largest city nearby). The clerk's office will be able to tell you if the tenant has filed for bankruptcy protection. Remember, insolvency does not necessarily lead to bankruptcy.
  • If the tenant has not yet filed, but its rent is past due, your best bet may be to use self-help. Often the lease gives the landlord the right to re-enter and take possession in the event of the tenant's default. In most states, the landlord must give a written five-day "pay or quit" notice before terminating the lease for nonpayment and obtaining possession. The landlord may also be entitled to recover back rent, actual damages, and reasonable attorneys' fees.
  • If the rent check bounces, the landlord may, in most states, demand payment within five days in cash, by cashier's check, or certified check and, if the rent is still not paid, obtain possession. The tenant may be saved from eviction, however, if the landlord somehow led the tenant to believe it could pay the rent late without risking forfeiture.
  • If the tenant abandons the property, the landlord may use self-help to take possession. Landlords should regularly visit their properties to make sure tenants have not moved out without notice. If they have, it is far better to get possession before the tenant files for bankruptcy.
  • If a lockout becomes necessary and is permitted in your state, do it quietly and peacefully. The best time is after hours, when the tenant is not present. Any kind of disruption may destroy the landlord's right to use self-help to regain possession.
  • If the tenant has filed for bankruptcy, do not panic. A commercial tenant is required by federal law to pay all past-due and current rent during the bankruptcy case. If payment is not made, the landlord can seek a court order compelling surrender of the premises and rejection of the lease or immediate payment of the rent due.
  • If the rent is unpaid at the time of filing, the landlord's best move is to file a motion for relief from the automatic stay imposed by bankruptcy law. This allows the landlord to regain possession and relet the premises even though the bankruptcy is still pending.

Copyright 1999 Quinlan Publishing Group Inc.