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Can bankruptcy help a business deal with a burdensome commercial lease?

On Behalf of | Dec 16, 2021 | Business Bankruptcy

A business struggling with debt has to deal with several problems. Among these is whether they can continue to afford their current premises or other real estate. Many Denver-area businesses rent their commercial space. But financial difficulties can make affording the rent for the balance of the lease an unreasonable burden.

Fortunately, Chapter 11 bankruptcy can help a struggling business find a solution to its lease problem and allow the company to restructure itself while staying in business. There are two main ways that Chapter 11 can help.

What bankruptcy can do to help Denver corporations do about their leases

First, filing creates an automatic stay on any eviction proceedings the landlord has begun. Usually, the landlord cannot use terms in the lease to get a waiver on the stay. At the very least, the stay can give the tenant time to find new premises with a minimal interruption in business.

Even more importantly, filing Chapter 11 gives the tenant the right to reject the lease, essentially canceling it, subject to the bankruptcy judge’s approval. The right to reject the lease is considered “vital to the basic purpose of Chapter 11.” Of course, by freeing itself of the responsibility of paying rent for the lease’s remaining term, the tenant also gives up the right to occupy the premises. The landlord may also respond by seeking a “rejection damages” claim.

An alternative is to find another party to assume the lease. The debtor must provide adequate assurance of future performance, i.e., that the new tenant will pay rent and uphold its other obligations under the lease’s terms. It must also cure all monetary defaults. The landlord has the right to object to the proposed assumption, and the judge may have to rule whether to accept it or not.

Weighing your options

The Chapter 11 process gives your business options for dealing with a pernicious lease, including potentially renegotiating it to include more favorable terms. Your bankruptcy attorney will go over these choices with you.