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Landlord's Rights When a Tenant Files For Bankruptcy

A landlord's hackles are certain to rise when it's whispered that an important commercial tenant has or is about to file for bankruptcy. There are several things you should do right away to protect your interests and keep the property from being pinned under the weighty thumb of the U.S. Bankruptcy Court.

First, find out if the rumour is true. Call the U.S. Bankruptcy Court for the Eastern District of Virginia and see if the tenant did, indeed, file for protection. The toll-free number is (800) 326-5879. Insolvency does not necessarily lead to bankruptcy.

If the tenant has not yet filed for bankruptcy protection, but his rent is past-due, your best bet may be to use self-help. Often the lease itself gives the landlord the right to re-enter and take possession in the event of the tenant's default. By law, the landlord must give a written five-day "pay or quit" notice before he can terminate the lease for nonpayment and obtain possession. The landlord may also be entitled to recover back rent, actual damages, and reasonable attorney's fees.

If the rent is paid with a check drawn on insufficient funds, the landlord may demand payment within five days in cash, by cashier's check, or certified check, and if the rent is still not paid, he can obtain possession. However, equity may step in to save the tenant from eviction if the landlord led the tenant to believe that he could pay the rent late without risking forfeiture.

The landlord also may use self-help to take possession after a tenant's abandonment. Landlords should regularly visit their properties to make sure tenants have not moved out without notice. It is far better to get possession before the tenant files for bankruptcy, especially if the lease is worth a lot of money.

Caveat: If a lock-out becomes necessary, do it quietly and peacefully. The best time is after hours, when the tenant is not at the premises. Any kind of disruption or unruliness may destroy the landlord's right to use self-help to regain possession.

Even if the tenant has filed for bankruptcy, there is still a silver lining. A commercial tenant is required by federal law to pay all past-due and current rent during pendency of 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. When a tenant files for bankruptcy protection, the effect is to "freeze" his assets, including his rights under a lease. The leasehold is swallowed up as part of his "bankruptcy estate," cutting off the landlord's right to use self-help to evict the debtor. The landlord's remedies are limited to those provided under federal bankruptcy law. Even if the landlord has a judgment against the tenant, he cannot enforce it against any property of the tenant once the latter files for bankruptcy.

If the rent is unpaid at the time of filing, the landlord's best course is to file a motion for relief from the automatic stay imposed by 11 U.S.C.A. §362. This allows the landlord to regain possession and re-let the premises, though the suit is still pending. It is axiomatic that the law rarely works instant miracles, so it should be no surprise that this procedure can be time-consuming. Best advice: be patient! You will get the premises back eventually.

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