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Where’s the Rent? Statutory and Contractual Payment Excuses in Pandemic Bankruptcies

Written by: Erin R. Fay

I. Introduction

By any measure, 2020 was an exceedingly challenging year for businesses. Market analysts reported 60 major retail bankruptcies, the largest number since the 2009 financial markets crisis,  160 consumer-facing business bankruptcies, and more than 12,200 store closures. Indeed, the pandemic appears to have accelerated long-anticipated changes in consumer behavior and exacerbated the existing abundance of retail square footage in the United States. The Bankruptcy Code contains numerous tools for debtors with large lease portfolios to restructure their businesses. The Bankruptcy Code, in turn, contains certain protections for landlords while a tenant is in bankruptcy. The pandemic tested the boundaries of these sometimes competing provisions as tenants’ revenues dried up overnight, but landlords required rent streams to enable them to pay their mortgages and maintain properties. Al-though the Bankruptcy Code would appear to contain little flexibility as to a debtor paying its post-petition rent, pandemic courts were hesitant to swiftly enforce rent payment obligations. Unsurprisingly, rent payment was a key issue in many pandemic retail bankruptcies.  Throughout the pandemic, debtors asked for relief from their post-petition rent obligations in a variety of ways—from extending rent payment dates to “mothballing” their operations and chapter 11 cases to abating or suspending rent payments. Despite section 365(d)(3) of the Bankruptcy Code which appears to require rent payments to be made when due (especially after the initial 60 days of a chapter 11 case), debtors were remarkably successful in delaying, reducing, or making no rent payments particularly in the beginning of the pandemic. Moreover, many of the relevant proceedings laid bare the procedural challenges required for courts to make nuanced decisions regarding portfolios of leases in a meaningful timeframe for all parties. Finally, these proceedings highlighted a potential statutory gap in that the Bankruptcy Code does not dictate the remedy if rent is not timely paid.

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Reprinted from Norton Journal of Bankruptcy Law and Practice, Vol. 30 No. 4 (August 2021), with permission of Thomson Reuters. Copyright © 2021. Further use without the permission of Thomson Reuters is prohibited. For further information about this publication, please visit https://legal.thomsonreuters.com/en/products/law-books or call 800.328.9352.

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