The cost to secure, furnish and insure commercial space is one of the biggest expenses generated by many businesses. Many organizations still require a physical location to operate, and related costs consume a significant portion of the money that a physical company generates.
Signing a lease is theoretically a cost-effective solution for a business run by leadership that is not sure of what the company’s long-term needs will be. After all, trying to purchase real property and cover a mortgage are intensive tasks that not every company is yet up to embracing.
By contrast, the average commercial lease lasts for at least a year, if not longer. Yet, the shorter duration of a lease – as opposed to a mortgage – does not guarantee that a company will be able to make its payments without issue. Many startups find themselves struggling and insolvent as they try to get off of the ground. If your organization is struggling and you choose to file for bankruptcy protection, you may be wondering what will happen with your company’s commercial real estate lease.
Bankruptcy law gives you three main options
Your lease is a type of executory contract, which means that you cannot simply discharge it. You will have to address the terms of the contract specifically with your landlord. You can potentially reaffirm or assume the contract, which means you will continue using the space and paying rent. Your landlord might even work with you to renegotiate some of the terms, although they may not.
The second option is to reassign the contract. Essentially, you can find someone else to take over your lease as a means of reducing the damage to your landlord and your liability for unpaid rent. Finally, the third option is to reject or terminate the lease. Even if you choose to end the lease or assign it to others, you may still have to repay some of your past-due rent.
The debt related to unpaid rent is actually a higher-priority debt than other financial obligations in a business bankruptcy, meaning that landlords have a better chance at securing repayment than certain other creditors do.
Bankruptcy can help right the ship or close down the shop
Some businesses filing for bankruptcy pursue Chapter 11 proceedings in an attempt to restructure their debt and regain control over the company. Closing certain facilities and renegotiating leases will often be part of this process.
Some business owners recognize that their company has become insolvent and will use bankruptcy to terminate their agreements with others and minimize the financial obligations they must resolve while closing down their company. In both cases, what happens with a commercial lease will have a profound impact on the rest of the process.
Addressing your commercial lease and most significant financial obligations will be very important as you prepare for a business bankruptcy filing. Don’t hesitate to seek professional guidance if you’re unsure of how best to proceed.