Issue 16 of Bankruptcy Basics touched on certain remedies landlords can pursue against their tenants that have filed bankruptcy. Perhaps the most drastic remedy a Bankruptcy Court can grant is relief from the automatic stay—an injunction triggered by the filing of a bankruptcy case that, among other things, protects the debtor-tenant’s property, including its leases. It is a bedrock bankruptcy principle prized by debtors that prevents a landlord from pursuing most collection or possession actions against a tenant that has filed bankruptcy.
A landlord that obtains relief from the automatic stay can pursue the actions it would normally pursue outside of bankruptcy. Landlords also need to be aware that, in some circumstances, the automatic stay may not apply; it’s often best, though, to seek confirmation or relief from the Bankruptcy Court if there’s any doubt regarding the applicability of the automatic stay.
Automatic Stay Relief for “Cause” or Other Grounds in a Retail Bankruptcy
The Bankruptcy Court may grant relief from the automatic stay for “cause”—an undefined and broad concept determined on a case-by-case basis and the totality of the circumstances. Landlords may be able to cite to the following in a motion to this effect:
- Tenant’s bankruptcy filing on the eve of trial in a collection or possession action
- History of non-payments or other defaults
- Non-operating business
Since Chapter 11 bankruptcy is meant to provide a debtor with breathing room to reorganize or otherwise move forward, judges are more likely to be skeptical of stay relief motions early in a case as opposed to later, when it may be more obvious there is no realistic path forward.
Relief from the automatic stay may also be granted when the tenant does not have “equity” in the lease and the lease is not necessary for an “effective reorganization.” A landlord may argue lack of equity by citing to a short remaining lease term, higher than market rental rates, or a pre-bankruptcy eviction proceeding, and a landlord may claim the tenant does not have a reasonable prospect of reorganizing because of a lack of funds to cure defaults or perhaps a business that can’t be sustained.
The Automatic Stay Does Not Always Apply in Retail Bankruptcies
There are various instances in which the filing of a bankruptcy does not operate as a stay. In retail bankruptcies, the most likely applicable exception is an act by a landlord to regain possession of premises where the term of the bankrupt tenant’s lease expired pre-bankruptcy (or at any point during the bankruptcy case). Even if a tenant holds over and continues performing under a lease, the expiration of the lease term makes the automatic stay inapplicable, as the lease is no longer property of the tenant’s bankruptcy estate. However, the stay would apply to a landlord’s actions with regard to the tenant’s property at the leased premises.
Given the potentially harsh consequences of an automatic stay violation—regardless of whether the offender knows they’re violating the stay—it is ordinarily prudent to seek relief from the Bankruptcy Court before pursuing actions to regain possession that would normally be covered by the stay.
What’s Next
Since launching Bankruptcy Basics in September 2022, we’ve worked hard to bring you concise summaries of a variety of retail bankruptcy topics, and now it’s time for a summer break. Don’t worry, though, we’ve still got plenty to do! With the rebound of retail bankruptcy activity in 2023, you’ll be sure to see us representing landlords in cases around the country. We’ll resume Bankruptcy Basics this fall.