Posts filed under ‘Legal Corner’

Legal Corner: Landlord Rights when a Tenant Files for Bankruptcy

hand with keysBy Christopher Huntley, Attorney

You’ve executed a lease, got your security deposit, confirmed the financials of your tenant, expended thousands of dollars worth of tenant improvements, and finally your tenant moves in.  All is well…until your tenant declares bankruptcy and your secure source of rent disappears.  The landlord’s rights in connection with a tenant bankruptcy are limited, but the landlord is not completely subject to the mercy of the bankruptcy court.  And, a landlord may be able to minimize or even completely remove its exposure if it plays the bankruptcy game correctly.

The Landlord’s Rights During a Tenant Bankruptcy
When landlords hear the word “bankruptcy,” most believe that they are facing an uphill battle that will rarely result in them retrieving what is rightfully theirs along with a long line of administrative hurdles that will cause them headaches for months or years to come.  The truth is that most landlords fare better than other unsecured creditors when their tenants declare bankruptcy.  It is true that a landlord is prohibited from suing the tenant for past due rent or other past due amounts during the bankruptcy proceeding if such amounts accrued prior to the tenant filing the bankruptcy petition, and any eviction proceedings will be put on hold once the bankruptcy petition is filed, but that is not the whole story. 

A landlord is generally compensated for all obligations that accrue under the lease during the bankruptcy proceeding as the bankrupt tenant or the bankruptcy trustee is obligated to continue to perform under the lease including paying all amounts that become due while the bankruptcy is ongoing.  And, the landlord is entitled to make a claim, and usually obtain compensation, for any defaults that arise during the bankruptcy. If the bankruptcy trustee assumes the lease (only applicable to reorganizations), the lease will continue as if no bankruptcy occurred, the tenant will need to either cure or provide adequate assurances that it will cure in the near future any existing defaults (including defaults that arise prior to the bankruptcy), and the tenant will be forced to demonstrate adequate assurances of future performance under the lease before the bankruptcy court will allow the tenant to assume the lease.  The landlord will essentially be made whole in such a situation.

The downside to a bankruptcy is (more…)

June 25, 2012 at 10:05 am

Tenant Rights When a Landlord Files for Bankruptcy

piggy  bankBy Christopher Huntley, Attorney

A tenant that faces a landlord bankruptcy is put into the precarious situation that it does not know what its fate is.  If the bankruptcy trustee accepts the tenant’s lease, the tenant must continue to satisfy its obligations under the lease as if no bankruptcy has occurred.  If the trustee determines that it is in the best interests of the debtor’s estate to reject the lease, the landlord will no longer have an obligation to perform under the lease and the tenant will be deprived of essential services, its leasehold interest, and potentially very expensive tenant improvements.  This type of situation makes it difficult for a tenant to plan its future and may be financially ruinous for tenants without deep pockets.  A tenant is put into the position where it must decide if it should risk defaulting on its lease and enter into a new lease so that it will have a place of business if the lease is rejected, or should it wait around until the bankruptcy court determines the fate of the existing lease and risk having to find a premises in a shortened timeframe.  Neither scenario is desired.

Rejecting the Lease
Generally, the bankruptcy trustee handling the landlord’s bankruptcy has the option to either accept or reject the tenant’s lease, but the court will only accept the lease rejection if the trustee demonstrates that that the rejection of the lease reflects a proper business judgment.  Absent such a showing, the debtor must accept the lease.

The amount of time in which this decision must be made depends on the type of bankruptcy that the landlord has filed.  For Chapter 7 liquidation cases involving residential property, the bankruptcy trustee must accept the lease within 60 days (or longer if the court orders a longer period) or the lease will be deemed rejected, and the trustee will generally allow the lease to be rejected unless the trustee believes that there is value in the lease. Tenants under Chapter 7 cases will at least know their fate fairly soon.

Residential tenants in Chapter 11 reorganizations are not in a better position as the trustee has no obligation to reject the lease until the point at which the reorganization plan has been adopted.  This process can take months or years.  A tenant, however, does not need to wait idly by while the bankruptcy trustee decides its fate. (more…)

March 20, 2012 at 9:14 am

Legal Corner: Purchase and Leasing Options

office buildingBy Christopher Huntley, Attorney

The illusive purchase or leasing option contained in many a lease has probably caused more lawsuits than any other lease provision. Landlords like these provisions as they please their tenants, help to close deals, and may lead to money down the road. A landlord that is considering granting such a right should be wary of doing so as options are usually not worth the hassle or the potential liability. If a landlord does grant such a right, the landlord should always use special care in drafting the language that grants the option so as to avoid many of the potential pitfalls associated with these rights. Failure to do so will likely result in future headaches and perhaps litigation.

Types of Options
There are two general categories of options granted in leases: purchase options and leasing options. The former grants the tenant with the right to purchase the landlord’s property under certain conditions. The latter allows the tenant to lease additional space in the landlord’s building, usually adjacent to the tenant’s existing space. Within each of these categories, however, are numerous subcategories. The most common are straight purchase or leasing options that state that the tenant can either lease a specific space or purchase a specific parcel within a definite timeframe and at a specific price or rental rate. Assuming that the terms of the purchase or lease are included in the option language, few problems arise from such options as the landlord and tenant know their rights and obligations.

The more complicated and problematic options are rights of first refusal and rights of first offer. (more…)

November 29, 2011 at 5:13 pm

Legal Rights Versus Practical Rights

Notebood & penBy Christopher Huntley, Attorney

A well written lease should have a comprehensive and aggressive remedies section in favor of the landlord.  The landlord’s rights should include the right to collect both past due and future rents, the right to re-enter the premises and relet it to another tenant, the right to terminate the lease, and the right to collect all damages incurred in connection with the tenant’s default. These rights will put the landlord in a position to recoup its losses and be made whole in the event that the tenant does not live up to its obligations under the lease…if the landlord can exercise its rights.  There is a difference between the legal rights granted to the landlord in a legal document, and the practical rights that the landlord will actually have if a dispute arises or if a tenant defaults.  The former is worthless if the latter does not exist. 

Cost of Litigation
The first, and usually the largest, hurdle to overcome in a dispute with a tenant is the cost of the litigation.  The old adage that the only ones who truly win in a legal dispute are the lawyers is very true when it comes to lease disputes as the legal costs that the landlord incurs can greatly outweigh the damages that the landlord will receive.  If a landlord is lucky, it has included language in its lease that states that the prevailing party can collect its legal fees from the other party.  This right, however, is also a double-edged sword as a landlord may lose and end up with not only having to pay damages to its tenant, but also both the landlord’s and the tenant’s legal fees.  This is a risky proposition.

Let’s consider the actual costs.  (more…)

September 26, 2011 at 11:38 am

The Constructively Evicted Tenant

Industrial DecayBy Christopher Huntley, Attorney

A reader recently asked me to write an article on what would be deemed a constructive eviction and what would a tenant’s chance be of getting out of a lease based on such a defense when the landlord does not maintain the property as it should.  Unfortunately, the rule for determining what constitutes a constructive eviction does not assist much in determining whether a constructive eviction has occurred.  A tenant, however, is not without options.

When Does a Constructive Eviction Occur?
A tenant will be deemed to have been constructively evicted from its premises if the landlord fails to provide a service that it is legally obligated to provide, or the landlord or a third party engages in an activity that the landlord has a duty to prevent, and such act or omission renders the tenant’s premises uninhabitable or the use and enjoyment of the tenant’s premises is so interfered with so as to justify an abandonment. In other words, it depends.  (more…)

August 1, 2011 at 12:45 pm

SNDAs: What are They and Why Should You Care?

By Christopher Huntley, Attorney

pen and paperSubordination, Non-Disturbance and Attornment Agreements (“SNDA”s) have become increasingly popular and are now prerequisites to most lending transactions.  We have all seen them, requested them, and negotiated lease provisions obligating the tenant to provide one when requested by the landlord’s lender.  Many of my clients, however, do not know what their function is or why they are significant. 

What Is a SNDA and Why Do Lenders Care?
The basic function of the SNDA is to set forth the rights of the lender under its mortgage vis-à-vis the tenants occupying space at the property mortgaged.  The basic SNDA accomplishes three goals:

(more…)

June 23, 2011 at 3:12 pm

My Tenant Won’t Leave at the End of Its Term – Now What?

By Christopher Huntley, Attorney

Office BuildingYour existing tenant’s lease has come to an end. You’ve lined up a new tenant, spent hours negotiating a lease, signed it up, and are ready to move forward. You only have one small problem; your existing tenant hasn’t vacated its premises yet. What can you do? A landlord’s behavior at this stage is key to how the courts will treat the existing tenant’s occupancy and therefore takes careful consideration.

How to Treat a Holdover Tenant
Under Minnesota law a landlord may either treat the holdover tenant’s occupancy as “wrongful” with no additional right of occupancy or as a tenant holding over under the terms of the existing lease. If the landlord selects the former, the landlord must follow specific rules to avoid an inadvertent extension of the lease term. First, the landlord must not dictate new lease terms or increase the tenant’s rental rate for the tenant’s occupancy as such demands will be deemed to be an acquiescence of the tenant’s occupancy and therefore an extension of the lease term. (more…)

May 25, 2011 at 8:30 am

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