Nativ Winiarsky Explores The Interplay of Real Estate Law and Bankruptcy: What Happens When Your Tenant Files Chapter 11
When a commercial tenant files for Chapter 11 bankruptcy protection, landlords are often thrust into a legal and financial gray zone, uncertain about their rights, the future of their lease agreement, and the proper path forward. While bankruptcy laws aim to provide debtors a fresh start, they also create a complex legal framework that commercial property owners must navigate with precision and care.
Understanding how real estate leases are handled in bankruptcy proceedings is critical to protecting your investments, minimizing losses, and asserting your rights as a creditor and landlord. Lawyer, Nativ Winiarsky of Kucker Marino Winiarsky & Bittens, explores the legal mechanics behind tenant bankruptcies, specifically Chapter 11 filings, and the critical strategies landlords can use to stay informed, involved, and proactive during the process.
Understanding Chapter 11 Bankruptcy
Chapter 11 bankruptcy is primarily used by businesses seeking to reorganize their debts while continuing operations. Nativ Winiarsky, lawyer, understands that, unlike liquidation under Chapter 7, Chapter 11 allows debtors (tenants, in this case) to remain in possession of their assets and restructure their obligations through a court-approved plan. For commercial landlords, this means that the lease with the tenant doesn’t automatically terminate, it enters a period of legal suspension, during which important decisions will be made.
One of the most immediate implications for landlords is the “automatic stay” provision. Upon filing, the tenant is granted an automatic stay under 11 U.S.C. §362, which temporarily halts all collection activities, including eviction proceedings. This stay can be frustrating for landlords, especially when a tenant has defaulted on rent or other lease obligations. However, landlords are not without recourse and must act strategically.
The Lease as an Executory Contract
Nativ Winiarsky, lawyer, explains that under bankruptcy law, a commercial lease is considered an “executory contract.” That is, both parties still have significant ongoing obligations to perform under the lease. As such, the tenant has the option, (subject to court approval), to assume or reject the lease under 11 U.S.C. §365.
- Assumption of Lease: If the tenant wishes to retain the lease and continue operations in the leased space, they must “assume” the lease. This requires them to cure all defaults (such as unpaid rent), compensate the landlord for any losses caused by those defaults, and provide adequate assurance of future performance. For landlords, this provision offers a chance to recover missed payments and secure commitments going forward—but it’s crucial to scrutinize the tenant’s ability to uphold these promises.
- Rejection of Lease: Alternatively, the tenant may choose to reject the lease, effectively terminating the agreement. This allows the tenant to walk away from the space, but it also opens the door for the landlord to file a claim for damages arising from the rejection.
Nativ Winiarsky of Kucker Marino Winiarsky & Bittens understands that this decision must be made within 120 days of the bankruptcy filing (extendable to 210 days with court approval), which creates a period of legal limbo for landlords. During this time, landlords must remain vigilant and involved in the case.
Objecting to Lease Assumption or Rejection
Landlords are not passive observers in this process. If a tenant seeks to assume a lease, the landlord has the right to object if the proposed cure amount is inadequate or if the assurances of future performance are not credible. For example, a tenant proposing to continue the lease while still operating at a substantial loss may not offer the landlord sufficient confidence or protection.
In such cases, the landlord can file a formal objection and request a hearing before the bankruptcy court. Nativ Winiarsky, lawyer, explains that the court will evaluate whether the tenant has met the legal requirements for assumption and whether the landlord’s rights have been fairly considered.
If a tenant rejects a lease, the landlord must act quickly to file a rejection damages claim, which is typically treated as a general unsecured claim. The damages are capped under 11 U.S.C. §502(b)(6), generally limited to the greater of one year’s rent or 15% of the remaining lease term, not to exceed three years.
Protecting Your Financial Interests
Successfully navigating a tenant’s Chapter 11 filing demands more than legal knowledge—it requires strategic action and timely intervention. Nativ Winiarsky shares key steps landlords should take:
- Engage Bankruptcy Counsel Early
Landlords should not wait until they receive formal court notices. As soon as a tenant files for bankruptcy, consult with an attorney experienced in both real estate and bankruptcy law. Your counsel can help assess your rights, draft objections, and guide negotiations. - File a Proof of Claim
To receive any distribution from the bankruptcy estate, landlords must file a proof of claim. Lawyer, Nativ Winiarsky of Kucker Marino Winiarsky & Bittens, explains that this document outlines the amount owed, including past-due rent, damages, and other lease-related obligations. Missing the claims deadline can mean forfeiting your right to compensation. - Monitor the Docket Closely
Bankruptcy proceedings are dynamic. Tenants may amend their filings, revise their reorganization plan, or change their intentions regarding the lease. Staying informed allows landlords to respond quickly and preserve their rights. - Seek Relief from the Automatic Stay, If Needed
If the tenant is not paying rent or is misusing the property, landlords may petition the court for relief from the automatic stay. This motion can allow landlords to resume eviction proceedings or retake possession of the premises. - Prepare for Reletting or Sale
If lease rejection seems likely, landlords should begin preparing to market the space. Even before regaining possession, laying the groundwork for new tenancy or sale can reduce vacancy periods and restore income.
Tenant bankruptcies can be financially disruptive and legally challenging. But for commercial landlords who understand the process, assert their rights, and engage proactively, it is possible to mitigate the risks and recover key losses. Whether your tenant is attempting to restructure or walk away, the bankruptcy code offers specific protections and tools. Nativ Winiarsky of Kucker Marino Winiarsky & Bittens emphasizes that, as with any complex legal scenario, early intervention and experienced counsel are critical.
