Type: Law Bulletins
Date: 02/09/2021

New Legislation Allows Small Businesses to Defer Rent Up to Four Months in Bankruptcy

While COVID-19 may have helped some businesses, such as food delivery services and internet retail shops, many other businesses have struggled to generate any income during the pandemic. Not only restaurants, but also fitness centers, bowling alleys, and similar businesses have been required to shut down or operate at reduced capacity.

Such businesses may want to reorganize in bankruptcy, but face the dilemma that they may not be able to comply with the Bankruptcy Code’s requirement that the debtor perform all post-petition obligations under a lease of nonresidential real property within 60 days of commencing the bankruptcy case. 11 U.S.C. § 365(d)(3). If the debtor does not do so, a landlord could seek dismissal, relief from the automatic stay, or other remedies. A bankruptcy filing could therefore fail if the debtor is uncertain about being able to pay post-petition rent within those 60 days.

In 2020, a number of companies filed motions asking bankruptcy courts to use their equitable powers to allow rent to be deferred indefinitely, despite language in the statute prohibiting an extension. The bankruptcy court for the Eastern District of Virginia, in the case of Pier 1 Imports, was the first court to grant such relief. In re: Pier 1 Imports, Inc., 615 B.R. 196 (Bankr. E.D. Va. 2020). Other courts, though, held that they lack authority to give debtors more than 60 days to perform post-petition obligations. See e.g., In re CEC Entertainment, Inc., Case No. 20-33163, 2020 WL 7356380 (Bankr. S.D. Tex. Dec. 14, 2020).

On Dec. 27, 2020, President Trump signed the Consolidated Appropriations Act (the act), which, among other things, provides statutory grounds for an extension of the 60-day period for small business debtors (as statutorily defined) who elect to proceed under subchapter V of chapter 11. The act specifically amends the Bankruptcy Code to authorize the court to extend the deadline for an additional 60 days if a subchapter V debtor can show it is “experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019.”

If the court authorizes an extension of the 60-day period, the act also provides that the deferred obligations shall be treated as administrative priority claims. Generally speaking, an administrative priority claim is a claim for the expenses of operating the business between the filing of the petition and the confirmation of the plan. Because subchapter V debtors are allowed to pay administrative expenses over the course of a three- to five-year plan, payment of the first four months of rent could be stretched out in installments. A small business debtor with a dramatic loss of revenue due to COVID-19 restrictions may not only defer paying rent for the first 120 days of their subchapter V case but may also be able to catch up over three to five years under a subchapter V plan.

For commercial landlords, this may at first seem disastrous. No landlord favors the idea that a tenant can skip rent for up to four months and then catch up on the missed rent over three to five years. The alternative, though, especially during ongoing social distancing regulations, may be that the business fails and never recovers. If that happens, the landlord never receives rent. Under the current economic climate, it may not be possible to find a replacement tenant. This may, as a result, be a good development for commercial landlords because struggling small business tenants now have slightly better odds of being able to reorganize and eventually catch up on their rent obligations.

Fortunately for commercial landlords, this amendment to the Bankruptcy Code will automatically sunset on Dec. 27, 2022, even though it will continue to apply in any subchapter V case commenced before the sunset date. While this amendment will have effect for only a few years, it may help save small businesses at a time when there is reduced demand for commercial real estate. In this way, it could be beneficial for both tenants and landlords.

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