The most likely impact of the economic shutdown due to COVID-19 will be a rise in evictions, loan defaults and bankruptcy filings.  While financial institutions, lessors and suppliers can be expected to work with many of their clients during this crisis, it is anticipated that not all businesses will survive. Last week, Crain’s Detroit reported unemployment claims over 385,000.  Already, many landlords and property owners are receiving notices that their tenants have filed for bankruptcy, which puts the brakes on rent collection and evictions. Moreover, more businesses will be able to turn to bankruptcy under the new Subchapter V, which provides for a faster, more cost-effective process of reorganization.  Subchapter V was established through the Small Business Reorganization Act of 2019 which became effective on February 19, 2020.

For property owners and landlords, there are some conditions that still may provide legal options despite these unprecedented circumstances.

If the lessee files a Chapter VII, the lessor must get lift of stay from the bankruptcy court before taking any eviction action in state court.

If the lessee files under Chapter 11, a debtor can assume or reject an unexpired lease.  There are several conditions to be aware of:

  • Assumption or rejection is subject to court approval.
  • The debtor must decide to assume or reject the lease within 120 days of filing bankruptcy or the date of an order confirming a plan of reorganization – whichever is earlier.  The debtor may get a 90-day extension from the court if he can show good cause to do so, but any further extensions are subject to court approval and the lessor’s written consent.
  • To assume a lease, the debtor must cure all defaults, including any unpaid accrued rent.  So if the lease is three months past due, and the tenant wants to stay, the tenant must bring the lease current as a condition of assumption. If the debtor does not assume the lease, and vacates, or for whatever reason does not pay while in possession, the landlord/owner is left with a first priority administrative claim for the unpaid rent up to the point possession is restored, and any damages to the property.
  • If the tenant rejects the lease, or goes past the deadline and the lease is deemed rejected, and remains in possession of the premises, the lessor must obtain lift of stay from the bankruptcy court before moving forward in state court with an eviction action.

If you have questions regarding the handling of economic issues arising from the COVID-19 pandemic, please contact a member of the Rhoades McKee Business or Creditors’ Rights Teams.

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