The Bankruptcy Code does not generally allow debtors to individually modify the terms of property leases. The Consolidated Appropriations Act, 2021 (“CAA”), which was signed into law on December 27, 2020 provides additional COVID-19 relief for businesses and individuals. This includes nine amendments to the Bankruptcy Code, three of which directly impact commercial debtor-tenants.
The Bankruptcy Code generally requires a debtor to pay its rental obligations during the case. Notwithstanding, at least one court has used a force majeure clause in a lease to offer rent abatement during bankruptcy. The court found that the Illinois governor’s executive order limiting restaurant capacity triggered the lease’s force majeure clause. A Massachusetts state court has also ruled this way.
The landlord had sought to enforce the obligation of the debtor to pay post-petition rent. The debtor argued its obligation to pay post-petition rent was excused by the force majeure clause. The court agreed with the debtor, allowing a 75% rent abatement in proportion to the percentage of floor space restricted by the ban on dining at the restaurant.
The specific lease in this case contained language offering the potential for relief. It included “governmental action” and “orders of government” in the force majeure clause. Other leases may explicitly exclude rent obligations from the scope of obligations excused by force majeure events.
Other courts have looked to the Bankruptcy Code to grant rent relief for debtor-tenants. The bankruptcy code requires timely payment of post-petition rent, but allows courts to extend the time for performance, for cause, up to 60 days following the petition date. Some bankruptcy courts have deferred payment of post-petition rent beyond the first 60 days of the case finding that it was in the best interest of the debtors and creditors to grant the requested relief.
The CAA amends the Bankruptcy Code to allow courts to extend the time for performance of lease obligations beyond the normal extension period, but only in a small business case. It extends the potential relief period for a potential total of 120 days if the debtor continues to experience material financial hardship due, directly or indirectly, to the pandemic. If an extension is granted for an obligation, the obligation is treated as an administrative expense that has priority for payment in bankruptcy.
Second, CAA extends the initial deadline for any debtor-tenant—not just small businesses—to assume or reject an unexpired lease of nonresidential real property to a total of 210 days after the petition date. Another provision already allows the court to extend the deadline to assume or reject a lease, for cause, by an additional 90 days. A debtor could potentially have as long as 300 days to decide whether to assume or reject an unexpired commercial lease without the consent of the landlord. The court may grant further extension upon written consent of the landlord.
The CAA also incentivizes a distressed company’s landlords and vendors to offer flexible payment terms by amending the Code’s preference provisions to provide that any covered payment of rental arrearages cannot be avoided as preferences. “Covered payments” are payments made under arrangements entered into between any debtor-tenant and their landlord on or after March 13, 2020 to defer or postpone payments owed under a lease. The arrangement may also include the debtor’s obligation to pay penalties or fees.
Commercial tenants that take advantage of the relief offered under the Bankruptcy Code should be aware that if they decide to assume a lease, they must cure all back rent. Section 365(b) generally requires that a debtor-tenant cure, or provide adequate assurance of prompt cure, of any default under the lease.
The CAA includes a two-year sunset after enactment, which means these amendments will be gone from the Bankruptcy Code on December 27, 2022.
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