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Business Leases: Tricky in Bankruptcy

The Bankruptcy Code doesn’t have a specific chapter addressing business bankruptcies. Debtors who own businesses must instead choose among options that are dispersed throughout the Bankruptcy Code based on their businesses’ and personal circumstances. One such circumstance that can influence the chapter debtor-owners choose is the fate of a lease for business property. For many small businesses, their location is a critical to their operations, whether they’re retailing merchandise or producing products. Consequently, the identity of the lessee on the lease can determine who can choose to assume the lease.

For many small businesses, one or more individual shareholders or principals are listed on the lease as the lessees, not the business as a legal entity. When this is the case, if the business files bankruptcy while the property’s lessees don’t, then they can continue using the location so long as they pay rent to the lessor. Usually, the business would be filing in chapter 11 unless its owners wanted to dissolve it in chapter 7, but the owners could still use the location for other purposes or negotiate some other agreement with the lessor.

Often, though, the owner-lessees also file bankruptcy along with the business, and it’s here that problems can arise because leases of nonresidential real property don’t come with the same options for debtors that personal property leases do. Typically, if a chapter 7 trustee rejects a lease, then the debtor can assume it thanks to section 365(p)(2) of the Bankruptcy Code. However, that section does not cover nonresidential real property leases, putting chapter 7 business debtors in a bind. Section 365(d)(4) spells out quite clearly that if the trustee does not assume or reject the lease within 120 days of the case’s filing, then the lease is deemed rejected and the trustee must immediately surrender the property to the lessor. Chapter 7 debtors do not receive an opportunity to assume the lease.

Chapter 11 and chapter 13 debtors, by contrast, do. Section 1123(b)(2) and section 1322(b)(7) allow chapter 11 debtors-in-possession and chapter 13 debtors, respectively, to propose assuming leases in their plans—no matter what the property involved. Section 365(d)(4) creates a situation in which debtors in either chapter can have their plans confirmed before triggering the automatic surrender of the leased property. Although, the section creates a general 120-day time limit for the trustee to make a decision, subject to further rules governing extensions.

The Bankruptcy Code treats nonresidential real property leases differently for debtors who file in different chapters, so if you’re a debtor whose business is facing financial difficulties, it’s crucial to hire an experienced New York bankruptcy lawyer to handle your case.

For answers to more questions about business bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy lawyers near me Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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