This blog recently discussed the rights and obligations a tenant needs to be aware of in event that his landlord dies during the tenancy. In a similar vein, it is also important for a tenant to know what can happen in the event his landlord is forced to declare bankruptcy.
The possibility that a landlord will be forced to declare bankruptcy is very real, especially given the financial uncertainty that often comes with owning and managing residential rental properties. Accordingly, it is imperative that tenants be aware of their rights should such a situation arise.
Once a landlord has filed for bankruptcy, the bankruptcy court will appoint a trustee, who is responsible for, among other things, reviewing the landlord’s assets and debts, selling or liquidating assets, collecting money owed to the landlord, and paying the landlord’s creditors. One of the trustee’s responsibilities is to determine whether to assume or reject the tenant’s lease.
If the trustee decides to assume the lease, then it remain in effect and the tenant must continue to satisfy its obligations there under as if the bankruptcy never happened. Before the trustee may assume the lease, he must first cure any defaults of the landlord arising under the lease, compensate the tenant for any damages stemming from the landlord’s default, and provide adequate assurances that the landlord will be able to perform his obligations under the lease in the future.
The biggest problem for the tenant arises during the time before the trustee decides to assume or reject the lease. During this period, the landlord is relieved of his duty to satisfy his obligations under the lease provisions. The landlord is not even required to provide essential services, repairs, or maintenance to the property. Contrarily, the tenant must still comply with the lease terms until the lease is either rejected or assumed by the trustee.
In the event the trustee rejects the lease, the tenant may be permitted to cancel if the lease contains a provision defining a bankruptcy rejection as a form of default allowing termination. The tenant may also file a claim in the landlord’s bankruptcy for damages resulting from the early termination of the lease or remain on the property for the remainder of the lease and off-set rental payments by any damages suffered as a result of the landlord’s failure to provide services under the lease.
Most importantly, the U.S. Bankruptcy Code allows a bankruptcy trustee to sell properties free and clear of any liens or interests, including those asserted by a tenant of the premises. A tenant must file an objection to the sale of a property in which he has an interest as the failure to do so may constitute a waiver of the right to challenge the sale.
Bankruptcy proceedings can be particularly harsh on tenants and provide them few protections. If you have questions regarding the rights or obligations of tenants under the law, contact the experienced real estate attorneys at The Slater Firm, Ltd. today.