Bankruptcy, Reorganization and Commercial Leases

Chapter 11 bankruptcy allows many businesses a chance to reorganize and attempt a comeback in tough times. However, we also see the remnants of those who do not make it, such as the dormant Circuit City stores still haunting many US shopping centers. Many business owners have been forced to face the realities of how commercial leases can affect their ability to reorganize.

Four years ago, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). One of the many features of bankruptcy law it changed was how  bankruptcy courts deal with the commercial leases of businesses attempting to reorganize.

Previously, companies in bankruptcy had a 60 day period to assume or reject their existing commercial lease, however, this period could be extended indefinitely by the bankruptcy court.

Under the BAPCPA, this provision was changed to allow a maximum period of 210 days for the business attempting reorganization to either assume the existing commercial lease (and all past and future obligations under it), or reject it and vacate.

Actually, the company declaring bankruptcy initially has 120 days to decide about their commercial lease. This can be extended another 90 days without the consent of the landlord (for the 210 day total). For any extension beyond this, however, the prior written consent of the landlord is required.

Critics have argued that the 210 day period forces businesses too quickly to decide whether they can make it. As Reuters recently reported, Congressional hearings over the failure of Circuit City brought forth the viewpoint from bankruptcy filers that the 210 days to deal with leases forces retailers to quit who otherwise might have remained viable.

While the old law routinely allowed longer periods before needing to assume or reject the lease, some also argue that uncertainty about location beyond 210 days has shortened the period for which new lenders are willing to finance businesses in reorganization.

• U.S. Lawmakers to Consider Changes to Bankruptcy Law (Bloomberg)
• Firm buys defunct Circuit City's brand, domain names (Houston Chronicle)
• Types of Leases (FindLaw)
• How Commercial Leases Are Made (FindLaw)
• Commercial Bankruptcy (provided by David G. Volman, Attorney at Law, L.L.C.)