Impact of a Tenant’s Bankruptcy During Lease Term

Updated on August 15, 2017

A tenant’s bankruptcy or insolvency does not automatically terminate an unexpired lease of real property. It does not matter whether the lease expressly authorizes early termination in the case that the tenant becomes insolvent or bankrupt, because these types of lease clauses are unenforceable.  [11 USC § 365(e); In re Cole (9th Cir. BAP 1998) 226 BR 647, 652.]

When a tenant files for bankruptcy this typically triggers an automatic stay of “the enforcement against the debtor or property of the estate of a judgment obtained before commencement of the bankruptcy case and “any act to obtain possession of property of the estate or of property from the estate . . .” [11 USC  §§§ 362 (a)(1), 362 (a)(2), & 362 (a)(3).]  Accordingly, as of the tenant’s filing of bankruptcy, the landlord cannot commence an unlawful detainer action, serve a three-day notice to quit, or take any further steps to prosecute a pending unlawful detainer. [Ibid.]  Further, the master lessor cannot take action against a tenant sublessor if it would adversely affect the possessory rights of a subtenant debtor who filed the bankruptcy petition.  [See In re 48th St. Steakhouse, Inc. (2d Cir. 1987) 835 F.2d 427, 430).]

ALSO READ  New HOA Rental Restrictions to the Davis-Stirling Act

There are two exceptions to the automatic stay related to residential unlawful detainers.   First, the automatic stay does not stay eviction when an unlawful detainer judgment has been obtained before the tenant’s bankruptcy filing for residential property in which the tenant debtor resides as a tenant under the lease. [11 USC  § 362 (b)(22).] Note, that this exception does not take effect for 30 days and is essentially a 30-day stay. [11 USC  §§§ 362 (b)(22), 362 (l)(1), 362 (l)(5).] Second, the automatic stay does not apply to an eviction action seeking residential property where “the debtor resides as a tenant under a lease . . . based on endangerment of such property or the illegal use of controlled substances on [the] property . . . “ [11 USC  § 362 (b)(23).]  Further, this exception applies fifteen days after the landlord serves the required certification to the tenant. [11 USC  § 362 (m)(1).]

For more information, contact Schorr Law, APC at (310) 954-1877 or [email protected].

ALSO READ  Long Term Covid Protections for Commercial Tenants End Due to Breach - Case Analysis