Business bankruptcy may facilitate a smooth dissolution process when a company fails or allow for restructuring and the preservation of a struggling business. In both cases, there may be a variety of financial obligations that can complicate the bankruptcy process. For example, organizations that lease commercial space are often subject to multi-year commitments; their leases may potentially persist long after the completion of the bankruptcy process.
Does bankruptcy automatically terminate commercial lease obligations for struggling business tenants?
There are three options for a business lease during bankruptcy
Federal bankruptcy regulations include provisions for executory contracts. Contracts that impose ongoing obligations may require a decision from a business leader during the bankruptcy process.
There are three standard options for a commercial lease during bankruptcy. Lease termination is common in cases where a business owner files a Chapter 7 bankruptcy to prepare for dissolution. Termination may also be necessary during restructuring if the company intends to close multiple locations to streamline its operations.
Other times, it may be possible to reaffirm the lease. The company can agree with the commercial landlord to continue the lease as written.
Finally, lease assignment may be an option. If the lease itself does not prohibit assignment to an outside party, the commercial tenant navigating bankruptcy can potentially find a replacement tenant to assume the remainder of their lease.
There are benefits and drawbacks to each of those solutions, and business leaders may need guidance as they start preparing for bankruptcy as a result. Reviewing a commercial lease and bankruptcy plans with a commercial law lawyer can help owners and company leaders appropriately address commercial lease obligations in ways that reflect their unique needs and circumstances.