- Scott Gilmore
What to Do When a Commercial Property Tenant Files for Bankruptcy
In a changing economic and commercial market, it’s hard to say who is safe from bankruptcy these days. In 2017, Toys R Us, filed for bankruptcy protection, adding to a long list of other major retailers who did the same, including: The Limited, RadioShack, Payless ShoeSource, Aerosoles, and Vitamin World. Shopping behavior has truly dictated the closings and bankruptcies of many of these stories.
As a commercial landlord, do you usually know if your tenant will be filing for bankruptcy? Yes, there will be some sure signs, including late rent payments, especially if it goes on for months. However, it still can be shocking and upsetting to receive a notice from Bankruptcy Court regarding the tenant.
In this notice, you will learn that the tenant filed for bankruptcy. You will receive the case number and important dates. It will also have a “automatic stay” in place, which is an order to all creditors that they cannot pursue collection actions, including evictions and collection letters for rent. Your next step is to consult with a creditor’s attorney, because creditor’s rights issues can be technical and complicated. If you, as the creditor, don’t follow the “automatic stay” you will be held in contempt of the Bankruptcy Court and would have to pay a fine.
Types of Commercial Property Bankruptcy
If your tenant files for a Chapter 7 bankruptcy, this means you most likely will loose out on back rent and the tenant will no longer stay in the unit.
If your tenant files a Chapter 11 bankruptcy, the tenant is trying to restructure their debt and is working with the court to pay you back any rent that is due.
If your tenant files a Chapter 13 bankruptcy, this means they are a smaller business and they are also looking to restructure their debt and pay you back. However, you may not receive all the money owed, but if they stay in your property, you do have a good chance of eventually receiving the back rents.
As a landlord, you can try and ask the Bankruptcy Court to ignore the “automatic stay,” so you can collect rent; this may work to your benefit if you were already mid-eviction. Many times, courts will force the tenant out if they are not pay rent or planning on paying rent in the future. As a creditor with a tenant in your property, you have the strongest case as a creditor to get paid through this bankruptcy. The decision and laws on this vary depending on state.
To get money owed, you must actively go for it by filing paperwork and attending hearings. If you’re late or miss these items or meetings, you will likely not get what you want. If one of your tenants plans to stay and restructure debt, they must follow their bankruptcy plan. If they fail to do so, you can get the court to remove them from your commercial property, and you can get past due rent.
Unfortunately, after a tenant files for bankruptcy, you as the landlord may be in a worst financial state due to losing out on rent. As a commercial real estate landlord, you can deduct losses and legal expenses on your taxes. If your space is unable to be filled, you can deduct in the tax year. An accountant or CPA can help you with this process.
If you receive a bankruptcy notice, your best bet is to act immediately, and call an attorney. You want to protect your investment and rights.
Looking for Commercial Property for Sale in Louisville?
As commercial real estate in Louisville goes, our team at HOWE Real Estate is familiar with the commercial real state tenant/landlord laws in the state, including rights regarding bankruptcy. If you have any questions regarding this topic, please feel free to reach out to us. If you’re looking for commercial property for sale in Louisville, let us help you get started on your search. We work with buyers, sellers, lessors and lessees across all property types in and around Louisville. To contact us, send us an email or call 502-890-4475.