“STUBBING” THE LANDLORD’S TOE What Rent is Collectible in Bankruptcy

November 7, 2011
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The Bankruptcy Code requires that a commercial tenant, which files a bankruptcy, must immediately begin to “timely perform” all leasehold obligations – to the extent that these obligations arise “from and after” the filing of the bankruptcy petition.

But, what if the lease states that rent becomes due on the first day of the month, and the tenant files bankruptcy on the tenth? Those twenty days after the filing are referred to as the “stub” period, and the courts differ on how they are treated.

In the Seventh Circuit, in the nation’s midland, the courts require that a bankrupt tenant immediately and automatically pay stub rent. In New Jersey, however, in the Third Circuit, a recent court ruling rejected this approach, requiring that a landlord first demonstrate that its tenant received an actual economic benefit from the premises during the stub period. The case is In re Goody’s Family Clothing Inc, and the Third Circuit relied on the principle that the “billing date” determines when a leasehold obligation arises. Thus, since the Goody’s lease made rent due on the first of the month, and debtor filed bankruptcy on the ninth, the due date for rent occurred prior to the bankruptcy filing. Therefore, the payment of rent was not one of the leasehold obligations that a debtor must “timely perform.”

Having said that, however, the court left the landlord a window. It allowed the landlord to file a motion and seek to prove that the debtor’s use of the leasehold premises during the stub period conferred an actual and necessary economic benefit on the debtor. If so, the landlord was allowed to recover the reasonable value of the premises during the stub period.

Landlords facing the bankruptcy of a commercial tenant need to carefully plan their strategy and should not sleep on their rights. We are here to assist you.