Brundage Law P.A.

Business Lawyers For Business People

Can business bankruptcy resolve lease-related company debts?

On Behalf of | Apr 4, 2023 | Business Litigation |

Numerous factors contribute to the overall operational costs of running a business. One of the biggest expenses for many operations, other than labor and raw materials, is the cost of commercial space. Rental rates for retail facilities or manufacturing premises are quite high, especially when compared with residential properties.

Additionally, the leases for such properties tend to last for multiple years, making them very expensive financial commitments. When businesses start to fall behind on rent, especially when they maintain numerous locations, their past-due rent payments could push them to the brink of insolvency. As a result, many company owners wonder whether, during business bankruptcy and restructuring, it is possible to resolve lease-related debts.

Businesses can renegotiate or terminate leases

Bankruptcy, especially restructuring efforts, give businesses an opportunity to make changes that could help them get out of the red. For example, the company attempting to restructure could suggest a system for repaying past-due rent a little at a time so that it does not overextend the company’s finances. Those hoping to keep the space will generally need to reach an agreement with the landlord and reaffirm the lease.

In some cases, they may be able to cooperate with the landlord to assign the lease to someone else. They could also ask the courts to terminate the lease so that they won’t have obligations to continue making payments going forward. However, especially in a restructuring effort as opposed to a Chapter 7 bankruptcy, past-due rent is not always easily discharged in bankruptcy proceedings.

Typically, landlords can demand payment for any rent, fees and interest accrued before the commercial tenant filed for bankruptcy. They could make a claim in court, although the rental debt will eventually become part of the unsecured debt that the business will discharge. In some cases, landlords can even initiate special lawsuits during bankruptcy if they think a tenant violated their rights and they want to exclude their debts from the automatic stay or discharge.

Communication with landlords can be an important step toward maximizing the benefits of a business bankruptcy. Exploring every viable solution with the assistance of a legal professional can help struggling business owners make the most out of a restructuring effort while trying to regain financial control.