Commercial Leases in Bankruptcy

Lexington, KY · Member since 2010 · 315 posts · 133 votes

I am interested in investing in a single - tenant industrial facility. I am curious as to where a lease stands in the event of bankruptcy.

I know you must do due diligence on the single tenant company that you have a lease signed with - this is most important.

It is my understanding that other than bankruptcy, there are not too many ways for the tenant to break lease? Is this true what other things might I watch out for besides bankruptcy.

Also, in the event of bankruptcy where does a lease stand. If the tenant has a 10 yea rlease and decides not to pay and/or is getting foreclosed on, what happens to the lease agreement.

I understand this is very sitauational, but help me get an understanding of what can happen and what to look out for.

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Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
16y
Commercial tenants do not always pay the rent timely. I have a client that leases a single tenant facility and is now 3 months behind on rent.

The landlord for the facility has been working with him because he knows the prospects of finding a new tenant for the facility would be very poor at this time. This landlord also owns a commercial retail space next door that has been vacant for 6 months.

So, you will want to know the financial health of this tenant. Bankruptcy is not the only concern. Also what is the market like in your area for similar commercial spaces?
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Don KonipolBusiness Member
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
16y
The bankruptcy court can invalidate a lease, however, if they do the bankrupt no longer has a lease nor a right to the premises.
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Jimmy H.
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Lexington, KY · Member since 2010 · 315 posts · 133 votes
16y
Charles, that is the type of situation i'm worried about. I will do due diligence on the company as well as what sorts of spaces I am competing with out ther ein the market. but given a 10 or 15 year lease that tenant is not going to move to a different spot because it's cheaper because they ar ebound by the lease.

In thi sparticular situation i'm looking at a newer contruction bank building with a 10 year lease and an industrial property that just had a 10 yea rlease signed with a large national recycling firm.

Don - if they do bankrupt the court CAN invalidat ethe lease but what about lease payment form prior months that are woed. Are you junior to all types of debt and liens in a lease? What othe roptions does the court have. What typically happens to a lease in BK?
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
Not a bankruptcy lawyer, but I think the bankrupt lessee can choose to keep the lease or reject it. If its rejected, its terminated and the landlord can demand possession. If its accepted, the tenant stays in place.

Any back rent goes into the "unsecured creditor" pile. Below secured creditors but above equity holders.

I don't think there is any "typical". Just depends on the circumstances. For you analysis, I think the safer assumption is to assume if the lessee goes bankrupt you're going to be out any back rent and you're going to lose your tenant.

I'd be extra diligent about a recycling facility. Lots of potential environmental hazards there. Losing that tenant might leave you with a big cleanup bill.
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