FEATURE ARTICLE, SEPTEMBER 2005

2005 BAPCP: TOUGH ACT TO FOLLOW?
What commercial landlords need to know about the new bankruptcy provisions.
Ian Landsberg

The passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the act) in April of this year has been branded the most significant piece of bankruptcy legislation to emerge in decades. Widely viewed as a victory for creditors, the legislation has led to several important changes to the rights of commercial and retail landlords in dealing with insolvent tenants. Scheduled to take effect in October of this year, the majority of the provisions of this Act will greatly alter a tenant’s perspective on when to file its reorganization.

The first change to the act substantially limits the time in which a commercial tenant filing bankruptcy may decide whether to assume or reject its existing lease. Under existing law, a debtor has 60 days from the date of bankruptcy filing in which to decide whether to assume or reject a nonresidential lease. Assumption typically means the debtor will continue to perform its obligations under the entirety of the lease or reject the lease and vacate the premises. However, the debtor could file a motion with the court within this 60-day period, requesting additional time in which to make this decision. This extension is typically granted, often extended through the time of plan confirmation which could be months or even a year or two after the bankruptcy filing.

The act has modified this provision of the code to terms that are more favorable to landlords. The modification provides the tenant with an initial 120-day period to assume or reject the lease. Should the debtor be unable to make such a decision within that period of time, it will be entitled to file a motion seeking a 90-day extension. If the tenant desires an additional extension of time, the landlord’s written consent will be required. 

This new provision prevents a tenant from delaying the decision-making process until the very end of its Chapter 11 reorganization. Under the previous rules, a tenant could continue stalling the decision-making process until it figured out what would be in its best interest. Now, tenants must choose relatively early in the Chapter 11 process whether they will assume or reject the lease and take the risk that further down the road their circumstances will be favorable to whatever decision they make.

Considering the severe time restraints imposed by the act, Congress took upon itself to add a provision limiting the landlord’s damages should the debtor later realize that an assumed lease should in fact have been rejected. Prior to the act, if a tenant first assumed a lease then decided to reject it, the entirety of the balance of the lease could potentially be deemed to be an administrative priority claim in the bankruptcy estate.

The act has modified this rule. Should a tenant assume a lease and thereafter reject the lease, the act now provides for future rent to be capped at a 2-year administrative claim upon rejection. This 2-year statutory cap is in addition to the rejection damages provided under Section 502(b)(6) of the Bankruptcy Code.

This amendment will strongly affect tenants who operate retail chains that depend heavily on business produced during peak shopping seasons. Considering the time constraints discussed above in which to assume or reject a lease, the tenant now may not have the luxury of waiting the entire bankruptcy to determine whether it will assume or reject the lease based on its sales volume and must instead take the risk of being subjected to the administrative expense claim if they choose to assume and then reject the lease.

Another pertinent modification provided for in the act involves a bankrupt tenant’s future ability to secure a commercial lease. The act now states that an insolvent tenant that has a nonmonetary default, which is impossible to cure, can now assume a lease under certain conditions. In order to assume a lease now, the tenant may cure the nonmonetary default by performing all obligations under the lease at or after the time of assumption. In addition, the tenant must further compensate the landlord for any losses which the landlord may have incurred as a result of the tenants nonmonetary default as part of the cure.

Ian Landsberg is a partner with Van Etten Suzumoto & Becket LLP and chairs the firm’s bankruptcy department.

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