When a debtor files a Chapter 13 bankruptcy, the automatic stay under Section 362 bars the lessor (landlord) from “any act to obtain possession of property of the estate or of property from the estate” except through the bankruptcy court. A debtor who remains in possession of leased property will be expected to continue to pay the rent for such property. But there can arise many legal issues regarding when the rent is payable, what priority it has in relation to other debts, the measure of the rent, and the collectability of any past rent due.
In Chapter 13, a debtor has the option to assume or reject a lease. In situations where the lease is for personal property or residential real property, the option may be exercised at any time before confirmation of the Chapter 13 plan. The plan itself may indicated whether a lease is to be accepted or rejected.
The lessor of nonresidential real property is treated a bit differently. If the debtor does not assume the lessor’s lease within 120 days or obtain an extension from the court, the debtor is technically obligated to surrender the property to the lessor. This deadline can be extended for 90 days.
Under Section 365 of the Code, the debtor also has extraordinary rights to assume and assign a lease, whether or not it is in default. This can be done even if the lease has a “non-assign” clause in it already. The debtor can even assign the lease to someone else, even if this person is not to the lessor’s liking.
Lessors (landlords) are entitled to rent payments during the Chapter 13 case, but not necessarily at the rate and at the exact terms specified in the original lease agreement. To assume a lease, the debtor will be required to cure any default in the lease, and provide adequate assurance of future performance.
If the debtor continues to use leased property after the filing of the bankruptcy case, the landlord may be entitled to compensation under Section 503(b) of the Code. This section requires that the court permit, as an “administrative expense”, the actual and necessary costs of preserving the estate. The measure of compensation will normally be the “reasonable value” of such use and enjoyment of the property, which may not necessarily be the rent mandated in the lease agreement.
In addition, a lessor whose property is actually used by the debtor is entitled to adequate protection payments under Section 363(e) of the Code, pending a decision by the debtor to assume or reject the lease. Some interesting issues can arise in situations where a debtor continues to remain in the premises after a lease has been overtly or constructively rejected.
These situations often arise where a tenant takes longer than expected to remove his or her belongings from the premises, or otherwise is unable to leave in a timely fashion. If a debtor continues to occupy the premises of a residence after rejection of the lease, the debtor may be liable to the landlord as a “tenant at sufferance.” Essentially, the tenant is viewed as a holdover tenant. In these situations, an alert landlord may seek to have the tenant pay a reasonable monthly amount for the use of the property while the tenant was there.
Clear-thinking landlords often find out that, considering all the rights that Chapter 13 tenants enjoy, it makes more sense to work out some arrangement whereby the debtor-tenant can remain in possession of the premises. It often makes sense to have an arrangement whereby the debtor pays a reasonable rent while using the premises to store personal property of the estate and looking for a purchaser of the property who might be willing to rent the premises.
If the lease has been rejected, the debtor will have to leave the premises, and motions for relief from the automatic stay may follow quickly to make sure that this in fact happens.
Under Section 362(b)(22), the automatic stay does not prevent the continuation of an eviction action in state court if the landlord had already obtained a judgment of possession against the debtor before the bankruptcy was filed. However, under Section 362(l), the debtor can postpone the termination of the automatic stay by depositing 30 days’ worth of rent with the clerk of the court, and then filing a certification that there are circumstances that would entitle the debtor to cure the entire default.
And if the default is in fact cured within the first 30 days of the filing, then the automatic stay continues in effect. If you are having issues as a tenant or a landlord and a bankruptcy case is being contemplated, it is important to get guidance on this area of the law quickly, so that options and remedies can be evaluated. The law in this area is complicated, and things can vary greatly whether the case is under Chapter 7, 13, or 11, and whether the lease is residential or commercial.