Landlord and Tenant Issues in Chapter 7 Bankruptcy

We have talked about one of the best kept secrets in bankruptcy cases when a Debtor is behind on a lease. Now, what happens if a Debtor is not behind? Once a Debtor files a petition in a Chapter 7 case, a Debtor takes on the responsibility, or the Trustee takes on the responsibility, to timely perform all obligations of the lease from the petition date until the lease is assumed or rejected. So, either the Debtor or the Trustee needs to stay current on the lease payments. If neither the Trustee nor the Debtor stays current on this duty, the Landlord may seek relief from the automatic stay.

Keep in mind that this process is different than the 30 day automatic stay termination because the Debtor is current going into the petition. The remedy of a motion to seek relief from the automatic stay must be filed because the 30 day automatic stay termination rule does not apply in this situation. The time line for the motion to seek relief from the automatic stay is generally a 90 day process.

Nevertheless, there are certain duties that a Debtor must ensure are completed in a Chapter 7 case even if the Debtor is current on the lease payment. The Code provides that a lease agreement is automatically rejected if the trustee does not assume or reject the lease within 60 days after the bankruptcy case is filed with the court. Therefore, the Debtor can be current and, 60 days after the bankruptcy was filed, the landlord can consider the lease rejected.

If the lease is rejected, the lease is considered to be breached as of the day before the bankruptcy filing and the landlord is entitled to repossess the premises pursuant to the remedies provided by State Law. The landlord is also then entitled to pre-petition damages as well as “rejection damages.” Rejection damages are determined as either 15 percent of the balance of the rent reserved in the lease or the rent reserved for one year from the filing date or surrender date.

So what can a landlord do if a Debtor is current and wants to keep the lease agreement in tact but the Debtor, due to failure of his counsel to indicate a rejected lease or assumed lease, has caused the landlord to be in limbo as to his intent. The landlord, through counsel, can file a motion requesting that the Debtor reject or assume the lease agreement.

As you can see, there are duties on behalf of both the Debtor and the landlord with respect to Title 11 that allow the parties to take appropriate actions in the court system with respect to lease agreements. The attitude often is that nothing must be stated if the Debtor is current, but that attitude is completely wrong pursuant to Title 11. Both the Debtor and the landlord should and must take steps to protect their interest in the lease agreement.

The effect of the Debtor not taking the right steps to complete his duties can result in the Debtor losing out on a property that he likes to live in, wants to live in, and can afford to live in. On the other hand, the landlord not taking the right steps in a Chapter 7 case could result in the harm of not being provided the remedies that are available to the landlord for protection.
The real issue is having an attorney understanding the duties when representing both the Debtor as well as the landlord.

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