Recent Bankruptcy Amendments of Significance to Commercial Landlords and Tenants

On December 27, 2020, the Consolidated Appropriations Act, 2021 (the “CAA”) was signed into law.  The CAA includes certain amendments to the United States Bankruptcy Code, 11 U.S.C. §§ 101 et seq. (“Bankruptcy Code”), that are of significance to commercial landlords and tenants.  The Bankruptcy Code amendments summarized below were enacted in response to the COVID-19 pandemic and sunset two years after their enactment, i.e., on December 27, 2022.  

Additional Time to Assume or Reject Unexpired Nonresidential Real Property Leases
Bankruptcy Code § 365(d)(4) has been amended to extend from 120 to 210 days following the date of commencement of a case the time within which a debtor or trustee has to assume or reject an unexpired lease of nonresidential real property under which the debtor is the lessee.  Amended Section 365(d)(4) retains the existing provision permitting a possible further extension, for an additional 90 days, upon a showing of cause.  Thus, the time period within which an unexpired lease of nonresidential real property, under which the debtor is the lessee, may be assumed or rejected may be up to 300 days following commencement of a case (or the date of confirmation of a plan, if earlier). 

Extension of Debtor’s Post-Petition Lease Obligations in Subchapter V Small Business Cases
Bankruptcy Code § 365(d)(3) has been amended to permit an extension of up to 120-days (a possible initial 60-days, plus a possible additional 60-days) following the date of commencement of a case (or the date the lease is assumed or rejected, if earlier), regarding the time within which a small business debtor in a Subchapter V Chapter 11 case has to perform post-petition obligations under an unexpired lease of nonresidential real property.  This extension may be granted if the debtor has experienced or is continuing to experience a material financial hardship due, directly or indirectly, to COVID-19.  Deferred obligations that are unpaid at the time of confirmation of a plan may be paid over time pursuant to the plan. 

This amendment only applies in qualifying small business Subchapter V Chapter 11 cases, where the debtor has debts aggregating not more than $7.5 million.  This $7.5 million debt eligibility limit for Subchapter V small business debtors represents a temporary increase provided by the CARES Act and reverts to the former $2,725,625 debt eligibility limit on March 27, 2021, unless further extended by Congress.   

Exemption of Covered Payment of Rental Arrearages From Avoidance as Preferential TransfersTo encourage landlords to enter into rent deferral agreements, Bankruptcy Code § 547 has been amended to exempt “covered payment of rental arrearages” made to a creditor within the 90-day period preceding the bankruptcy filing and that otherwise might have been recoverable as avoidable preferential transfers made outside the ordinary course of business.  In order to qualify for this exemption, any such payments must have been made on account of (i) a lease that was entered into before the bankruptcy filing, (ii) a lease that was amended after March 13, 2020, and (iii) a lease amendment that deferred or postponed payments otherwise due under the lease.  However, payments are not exempt to the extent attributable to fees, penalties or interest imposed pursuant to any such post-March 13, 2020 lease amendment.

The Bankruptcy Code is complex.  COVID-19 and its impact on business might result in further amendments to the Bankruptcy Code and otherwise complicate bankruptcy proceedings.  If you have questions or may require assistance with a bankruptcy case, please contact your relationship attorney.