Earlier this year, some bankruptcy courts allowed companies in bankruptcy to occupy their leased premises despite stopping to pay rent. Formerly, Bankruptcy Code Section 365(d)(3) required debtors who wanted to continue occupying their premises, to pay rent as it came due. A court had the discretion to give a debtor more time to pay any rent that came due, but the court did not have the discretion to extend the period for performance for more than 60 days after the bankruptcy’s case commencement. Despite the law, some bankruptcy judges granted extensions beyond the 60-day deadline, presumably because of the pandemic’s unprecedented circumstances.
On December 27, the President signed the Consolidated Appropriations Act of 2021 into law. The Act amends Bankruptcy Code Section 365(d)(3), allowing a judge to grant “small businesses” an additional 60-day extension to pay rent when the pandemic has created hardship for the tenant-debtor. In effect, this is a four-month rent holiday.
The Act also amends Section 365(d)(4), extending the tenant-debtor’s deadline for rejecting unexpired commercial leases from 120 days to 210 days. With the law now defining a small business as one with less than $7.5M in debt, many tenants may qualify. The Act, in combination with practical considerations, now allows a qualifying tenant-debtor to maintain control of the leased premises for almost a year before deciding whether to reject or assume the lease. During this period, landlords remain in limbo.
There’s no question that the government should allow extraordinary relief to pandemic-stricken businesses. Extensions to the deadline to pay post-bankruptcy petition rent makes some sense where a government shutdown prevents the tenant from operating an otherwise viable business. It makes far less sense when the extension unfairly penalizes a landlord to allow a bankruptcy sale that benefits other creditors. The new law makes no such distinctions.
That the Act provides no relief to landlords is astounding. Many landlords are small businesses with even less than $7.5M in debt. The Act excludes companies that own single real estate assets from the definition of a small business. The old law required administrative expenses to be paid on plan confirmation. While accrued rent still has administrative priority, the Act now raises the possibility that accrued rent will be paid, if at all, over several years. Moreover, it’s not clear that a landlord has the right to take back possession of the premises if a tenant fails to pay rent after the new 120-day period expires.
Although the Act does provide landlords some advantage in collecting accrued rents, this small advantage falls far short of what landlords need. Legislatures and courts have made impressive efforts to support tenants and lenders. Out of fairness, these targeted benefits must flow through to landlords—especially small landlords. Absent balancing legislation, landlords will not be able to pay debt service and property expenses. They will fail, and real estate ownership will shift from small business entrepreneurs to predatory buyers. If Congress did not intend this result, why does Congress—and state legislatures—remain silent about balanced relief for landlords?
