Bankruptcy Code Changes Impact Donor After COVID-19 – Insolvency / Bankruptcy / Restructuring

United States: Bankruptcy Code Changes Impact Landlords After COVID-19

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With vaccines available and restrictions lifted, restaurant capacities have increased, moratoria are ending and handshakes abound. With this return to normal comes the need to deal with the continuing impact of COVID-19 and the legislation enacted in response. For example, the changes made by the CARES (Coronavirus Aid, Relief, and Economic Security) law to the Bankruptcy Code will have an impact until at least December 2022. In addition to increasing the debt ceiling to 7.5 million For small business dollars in Subchapter V, three specific changes will impact lessors in their dealings with tenants at risk of bankruptcy:

  • Extension of debtors to meet obligations under a commercial lease (section 365 (d) (3))
    Section 365 (d) (3) of the Bankruptcy Code requires a debtor to fulfill all of its obligations under any unmatured lease of non-residential property on time. Under the CARES Act, a subchapter V small business debtor may be granted additional time to comply with lease obligations after petition. While any debtor or trustee can benefit from a 60-day grace period for just cause, a subchapter V debtor who can demonstrate significant financial hardship resulting, directly or indirectly, from the COVID-19 pandemic may be be granted an additional 60 days (up to 120 days in total) by the bankruptcy court.
  • Increase in the time allowed for the debtor / tenant to assume or reject a non-residential lease (article 365 (d) (4))
    The CARES Act also amended section 365 (d) (4). Previously, a debtor had to assume or reject a commercial lease within 120 days of filing for bankruptcy. Congress has increased this time limit to 90 days, which means a debtor now has 210 days to decide whether to accept or reject. Courts can always grant an additional 90-day extension for cause, giving the debtor up to 300 days to make the decision (without needing the lessor’s consent for an additional time).
  • Protection of owners against recovery of preferential payments (Article 547)
    Section 547 of the Bankruptcy Code allows a bankruptcy trustee or debtor to collect certain payments made to creditors within 90 days of filing for bankruptcy. Under current law, this provision is subject to certain defenses, such as contemporaneous exchanges of value or payments made in the ordinary course of business. To encourage rent deferral, the amendment to the CARES Act now protects a business owner from having to repay preferential payments if they were made “in connection with” an agreement or arrangement to defer rent after the 13th. March 2020. This amendment only applies to rent payments and excludes the payment of fees, penalties or interest that a debtor would otherwise have had without the postponement.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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