Changes in Bankruptcy Code Favorable to Landlords

The new federal bankruptcy law contains favorable provisions for both residential and commercial landlords. The new law takes effect on October 17, 2005 and will affect any bankruptcies filed on or after that date.

I. Residential Landlords

Under the current law, the automatic stay takes effect upon the filing of a bankruptcy petition and requires all creditors to stop all collection efforts immediately. This means that a landlord must stop all legal actions and eviction proceedings against a delinquent tenant upon the tenant's filing of a bankruptcy petition and during the pendency of the bankruptcy case. The automatic stay has the effect of requiring a landlord to provide free rent to a bankrupt tenant until the automatic stay is lifted at the end of the bankruptcy proceedings.

The new law modifies the requirements of the automatic stay by allowing a landlord to continue with an eviction proceeding even after the filing of a bankruptcy petition so long as the landlord has obtained a judgment of possession prior to the bankruptcy filing, unless the tenant deposits with the court the unpaid rent amount. The new law also allows a landlord to evict a tenant who has filed bankruptcy if the landlord certifies that a "dangerous activity" is occurring on the premises or it is shown that an illegal drug activity is occurring on the premises. If the tenant objects, then the bankruptcy court will hold a hearing within ten days of the objection.

II. Commercial Landlords

Chapter 11 of the Bankruptcy Code is the section under which most businesses file for bankruptcy. Chapter 11 allows businesses to reorganize their debts and contains a provision which allows a debtor to assume or reject leases within 60 days of filing bankruptcy. In practice, debtors routinely sought and received extensions of the 60 day deadline from the bankruptcy court, stretching out the period of uncertainty for landlords.

The new law now gives debtors 120 days to assume or reject leases but only allows debtors one 90 day extension, unless the landlord specifically agrees to a longer extension. If a debtor rejects a lease later in the bankruptcy process for a previously assumed lease, then the landlord's claim for damages from breach of the lease obtains administrative priority status, meaning that landlord will be paid in the same way as all post-petition obligations, such as the debtor's post-petition legal fees.