Homeowner protections give bankruptcy prevention agreements a boost

Business owners have a greater incentive to grant rent deferrals to struggling physical businesses following a temporary rule change that prevents bankrupt tenants from recovering rent payments made under these agreements.

Bankruptcy law allows debtors to take legal action to recover certain “preferential” payments they made within 90 days of filing for bankruptcy. But the latest rule change, which is part of the $ 2.3 billion stimulus package package Congress passed in late December, barring bankrupt tenants from such lawsuits to recover rents paid under a deferred rental agreement they reached with their landlords within 90 days.

The change expires in December 2022. But without it, retailers, restaurants, cinemas and other commercial tenants who benefited from a landlord break during the pandemic could try to recoup their rent after filing for bankruptcy, the lawyer said. Ivan Gold of Allen Matkins Leck Gamble Mallory & Natsis LLP.

“No good deed goes unpunished,” he said. “It was to facilitate the deals so that people don’t go bankrupt.”

With thousands of commercial leases restructured in the wake of the pandemic, the temporary change “opens the door for landlords and tenants to work together,” said Michael Jerbich, president of B. Riley Real Estate LLC, which has advised companies like JC Penney Co. and Sears Holdings Corp.

Congress has focused on large landlords such as mall and shopping center owners, but the new law also benefits troubled tenants by encouraging more leniency towards rent.

“I think these provisions are meant to help debtors more than anything,” said lawyer Fred Ringel of Robinson Brog Leinwand Greene Genovese & Gluck PC. “There could be bankruptcy avoided because of this.”

“Preferential transfers”

The bankruptcy code normally allows debtors to sue for “preferential transfers” that they made in the 90 days preceding the bankruptcy and which were not in the “ordinary course of business”, which includes payments under rental deferral agreements.

Such payments can be seen as debtors preferring the owner’s debt to other creditors, who are instead forced to pursue their pre-bankruptcy claims through court proceedings.

Credible lawsuits against homeowners to recover preference payments are “fairly rare,” but they do occur, said bankruptcy attorney Robert LeHane of Kelley Drye & Warren LLP. And they typically settle at around 50 cents on the dollar, he said.

At the start of the pandemic a year ago, Gold was bombarded with calls from business owners concerned about the risks of entering into rent deferral deals with businesses that have been shut down indefinitely.

“That’s all everyone was talking about this week,” said Gold, who specializes in real estate litigation.

LeHane encouraged his landlord clients to enter into deferred rent agreements during the pandemic, but he also warned them of their potential legal exposure.

Targeted relief

Last year, Gold partnered with the International Council of Shopping Centers, a retail association, to develop invoice wording that was ultimately incorporated into the bankruptcy code review. The bill has been packed with other amendments aimed specifically at the impact of Covid-19 on landlords and tenants.

The stimulus measure also gives bankrupt businesses more time to decide whether to keep or reject commercial leases. Small Chapter 11 businesses can also request to defer rent payments for up to 120 days.

These changes, like the clawback provision, also expire in December 2022.

“When you look at it as a whole, it was a very balanced approach for landlords as well as tenants,” said Betsy Laird, senior vice president of ICSC. The law should help tenants and landlords “weather this storm,” she said.

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