Although we are long past the cold shoulder of the financial crisis, 3,078 companies went bankrupt in 2023. Not since 2010 have so many companies gone bankrupt in a single year. According to Statistics Denmark, the curve has broken in the first quarter of 2024, with 641 bankruptcies in the first three months of the year - 25.7% lower than the same quarter last year. This is positive.
When a commercial tenant goes bankrupt, it can have a major impact on the landlord, who risks suffering a financial loss. That's why it's important for landlords to know how to react to the bankruptcy estate - and not least what options they have. The topic of this article is therefore exclusively about what options you have as a landlord and what you should pay particular attention to when a commercial tenant goes bankrupt. See how we can help you in connection with business lease law.
What are the immediate consequences of a commercial tenant bankruptcy?
When a commercial tenant goes bankrupt, the commercial lease is included in the bankruptcy estate, which are the assets included in the bankruptcy. This also means that the commercial lease is covered by Chapter 7 of the Bankruptcy Act, which sets out a number of rules and options for the landlord and trustee regarding the commercial lease.
The first thing the landlord should be aware of is that the commercial tenant's bankruptcy does not in itself constitute a breach of the lease. Therefore, the landlord will not be able to claim remedies for breach - unless the commercial tenant has otherwise breached the commercial lease, for example in the form of non-payment of rent prior to the bankruptcy, which will often be the case.
If the landlord has already terminated the tenancy on the basis of payment default before the commercial tenant's bankruptcy, this termination will continue to apply to the commercial tenant's bankruptcy estate, and the fact that the tenant is placed in bankruptcy proceedings will not change this (note that special rules apply to Restructuring on this point, which are not covered in this article).
If the bankruptcy estate of the commercial tenant chooses not to enter into the commercial lease, this will constitute a breach and the landlord can terminate the lease. This will be elaborated below.
When a commercial tenant has gone bankrupt, it's important that the landlord is aware to contact the trustee directly and not the now bankrupt commercial tenant. This is because the commercial tenant (i.e. typically the management of the commercial tenant company) is deprived of all its rights and decision-making powers over the commercial lease as a result of the bankruptcy. Therefore, the business tenant cannot receive any notices with legal effect regarding the commercial lease. Only the trustee in bankruptcy can do so.
Repayment of, for example, a balance on a utility bill cannot be made with discharging effect to anyone other than the bankruptcy estate. The landlord risks having to pay the amount twice if he pays someone other than the bankruptcy estate during the bankruptcy proceedings.
Types of claims in bankruptcy - the bankruptcy order
In bankruptcy, the bankrupt's debts are divided into different categories called the bankruptcy order. As a creditor, it is crucial which category your claim belongs to, as experience shows that claims in certain categories rarely receive coverage.
In general, the following types of claims are made in bankruptcy:
- Mass claims are preferential claims, such as the trustee's fees and agreements entered into by the bankruptcy estate, which together with the other mass claims are covered before the bankrupt's other debts, see section 93 of the Bankruptcy Act.
- Privileged claims are the next category in the bankruptcy order. This type of debt is only paid if the estate still has funds after the mass claims have been settled, cf. sections 94 - 96 of the Bankruptcy Act, and is typically claims for wages to employees.
- Simple claims include all claims that are not covered by the other categories. These are only covered when both mass claims and privileged claims are fully covered, cf. section 97 of the Bankruptcy Act.
- Subordinated claims will only be paid if all other claims have been fully covered, cf. section 98 of the Bankruptcy Act.
Whether it is a simple claim or a mass claim is important to keep in mind in the review below.
What options does the commercial landlord have against the bankruptcy estate?
In the event of a commercial tenant's bankruptcy, the landlord may initially require the bankruptcy estate to decide whether the bankruptcy estate wishes to enter into the commercial lease and thus continue the tenancy or whether the bankruptcy estate does not wish to enter into the lease. According to section 55(2) of the Bankruptcy Act, the bankruptcy estate must respond without undue delay.
If the landlord is certain that the bankruptcy estate does not want to enter into the lease agreement, the landlord can seek to limit its loss by terminating the lease, e.g. by referring to the bankruptcy estate's payment default.
If the landlord is not able to terminate the lease, another important way in which the landlord can seek to limit his loss is to invoke section 62 of the Bankruptcy Act. According to the provision, the landlord is entitled to rent during the period from the date of the bankruptcy order, and while the estate is considering whether it will enter, the status changes from a simple claim to a mass claim if the bankruptcy estate cannot immediately make a declaration as to whether it will enter into the tenancy.
The bankruptcy estate can only avoid a claim for rent during the cooling-off period becoming a mass claim by immediately declaring that it does not arise. In this context, "immediately" must be understood literally. If a cooling-off period is needed, the price for the bankruptcy estate becomes a mass claim. Such a change in the status of the rent will minimize the landlord's risk of incurring further losses on missing rent during the bankruptcy period while the estate is considering the situation.
If the lessor wants the provision in section 62 of the Bankruptcy Act to apply, the lessor must, with reference to section 62 of the Bankruptcy Act, request the bankruptcy estate to make a decision under section 55 of the Bankruptcy Act and at the same time expressly state to the bankruptcy estate that the rent, during the period until the estate's decision is made, must be covered as a mass claim.
As mentioned, the bankruptcy estate has two options:
1. The bankruptcy estate can choose not to enter the lease
If the bankruptcy estate chooses not to take possession of the commercial lease or does not respond without undue delay pursuant to section 55(2), the lessor may terminate the lease pursuant to section 58 of the Bankruptcy Act and claim compensation for its loss under the lease, see section 59 of the Bankruptcy Act. The landlord's repair claims, claims for rent during the notice period and other claims for damages under the lease can be filed as simple claims in the bankruptcy estate.
2. The bankruptcy estate can choose to enter the lease (right of entry)
If the bankruptcy estate enters into the lease, the estate becomes entitled and obligated to the terms of the commercial lease. However, it follows from section 56(2) of the Bankruptcy Act that if the agreement concerns ongoing services, only the landlord's claim for payment for the period after the commencement of the bankruptcy proceedings and until the termination of the lease becomes a mass claim.
The provision means that the landlord can only demand that current obligations such as rent and utility expenses are covered as mass claims and not, for example, refurbishment costs, unless such claims have arisen in direct connection with the estate's actual transactions in the tenancy. In addition, the rule implies in particular that claims relating to the period after the bankruptcy estate's use of the tenancy are merely simple claims.
Right to resign (upon joining) - shortened notice period
As it is often only necessary for the bankruptcy estate to use the lease for a limited period of time, the bankruptcy estate also has a right of withdrawal. This follows from section 55(3) of the Bankruptcy Act, according to which the bankruptcy estate can terminate the tenancy that the bankruptcy estate has entered into with one month's notice, regardless of what else may have been agreed in the business lease. During the period in which the estate uses the lease as a result of the entry and during the one-month notice period, the landlord's claim for rent and ongoing services is a mass claim.
The landlord's claim for rent for the remaining contractual period of notice and non-terminability (which may be subject to bankruptcy regulation, see below) and the landlord's claim for refurbishment costs will be simple claims in the bankruptcy estate. There is often not full coverage for the creditors' simple claims, and the landlord must therefore often expect this amount to be lost.
Tacit entry
By its actions and failure to give notice of non-entry, the bankruptcy estate may be deemed to have entered the lease and thereby be bound by the terms of the lease with the consequence that the landlord obtains mass claim status for claims for rent and ongoing services in the period from the bankruptcy and until the estate vacates. Tacit commencement will typically take place by the bankruptcy estate actively continuing to use the commercial lease for a period of time and continuing to operate from the lease without this operation taking place with a view to emptying and handing over the lease. However, it is a very specific assessment whether the bankruptcy estate is considered to have entered, and the issue will not be discussed further here.
Bankruptcy regulation
The bankruptcy estate is not necessarily bound by the notice period originally agreed between the landlord and the commercial tenant - even if non-terminability has been agreed. This applies both where the bankruptcy estate does not wish to enter into the agreement and where the bankruptcy estate has entered but later wishes to terminate and withdraw from the commercial lease pursuant to section 55(3) of the Bankruptcy Act.
The rules of the Bankruptcy Act therefore allow the bankruptcy estate to regulate the contractual notices. This means that the notice of termination and non-termination period of the tenancy can be regulated down to a ''customary'' or ''reasonable'' notice. As a starting point, a customary notice period is what follows from the rules of the tenancy legislation, which is usually three months.
However, case law has established that a reasonable notice period can be longer in certain circumstances, for example if the landlord has customized a lease according to the business tenant's wishes and needs. In these cases, a notice period of 6-12 months will often be customary and reasonable, but it depends on the specific situation.
The consequence of the bankruptcy regulation is that the bankruptcy estate only has to recognize the regulated notice of, for example, three months' notice and not a longer agreed notice. The landlord can therefore only file a claim and set off against his deposit for a period corresponding to the regulated notice.
It is important to note that the security deposit and other collateral held by the landlord will continue to secure the landlord's other claims under the lease, but in relation to notice and non-terminability it will only secure the regulated notice.
If you have any questions regarding this article or what bankruptcy entails and what it includes, you are welcome to contact CLEMENS debt collection specialists and Restructuring.
Contact us for a no-obligation discussion about commercial leasesContact us for a no-obligation discussion if your tenant has gone bankrupt or if you have a question about a commercial lease.