Amendments to the Bankruptcy Code Impact Lessors Post COVID-19

With available vaccines and lifted restrictions, restaurant capacities have increased, moratoriums are ending, and handshakes abound. This return to normalcy comes along with the need to address the ongoing impact of COVID-19 and legislation enacted in response. For example, the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s amendments to the Bankruptcy Code will have an impact through at least December 2022. In addition to increasing the debt limitation to $7.5 million for Subchapter V small businesses, three particular amendments will impact lessors in dealing with lessees facing bankruptcy:

• Debtors’ Extension to Meet Obligations Under a Commercial Property Lease (Section 365(d)(3))
  Section 365(d)(3) of the Bankruptcy Code requires a debtor to timely perform all of their obligations under any unexpired lease of nonresidential property. Under the CARES Act, a Subchapter V small business debtor can be given more time in order to comply with lease obligations post-petition. While any debtor or trustee can have a 60-day grace period for cause, a Subchapter V debtor that can demonstrate a material financial hardship stemming, directly or indirectly, from the COVID-19 pandemic may be granted an additional 60 days (up to 120 days total) by the bankruptcy court.
• Increased Amount of Time for Debtor/Lessee to Assume or Reject a Non-Residential Lease (Section 365(d)(4))
  The CARES Act also amended Section 365(d)(4). Previously, a debtor had to assume or reject a commercial property lease within 120 days of the bankruptcy filing. Congress has increased this period by 90 days, meaning a debtor now has 210 days to decide on assumption or rejection. Courts can still grant an additional 90-day extension for cause, giving the debtor up to 300 days to make the decision (without needing the consent of the lessor for additional time).
• Landlord Protection From Preferential Payment Recoveries (Section 547)
  Section 547 of the Bankruptcy Code enables a bankruptcy trustee or debtor to recover certain payments made to creditors in the 90 days preceding the bankruptcy filing. Under current law, this provision is subject to certain defenses, such as contemporaneous exchanges of value or payments made in the ordinary course of business. To incentivize rent deferral, the CARES Act amendment now protects a commercial landlord from having to return payments as preferential if they were made “in connection with” an agreement or arrangement to defer rent subsequent to March 13, 2020. This amendment only applies to rent payments and excludes payment of fees, penalties, or interest a debtor may otherwise have owed without the deferral.

While we are waiting to see if there will be a flood of bankruptcies as we reemerge, Stites & Harbison’s attorneys are ready to help you with any questions you may have regarding renegotiation of your leases or other restructuring issues.