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What are the best practices for handling subleasing and assignment rights when a tenant goes bankrupt?

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When a tenant goes bankrupt, it can create a lot of uncertainty and complications for the landlord and any subtenants or assignees involved. Subleasing and assignment rights are contractual provisions that allow a tenant to transfer some or all of their lease obligations to a third party. However, these rights are not absolute and may be affected by the tenant's bankruptcy status. In this article, you will learn what are the best practices for handling subleasing and assignment rights when a tenant goes bankrupt, and how to protect your interests as a landlord or a subtenant.

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Johnathan C. Bolton

1 Understand the difference between subleasing and assignment

Subleasing and assignment are two different ways of transferring lease obligations, and they have different implications for the parties involved. A sublease is a separate agreement between the original tenant and a subtenant, where the original tenant remains liable for the lease and retains some rights to the premises. An assignment is a complete transfer of the lease from the original tenant to an assignee, where the original tenant is released from the lease and has no rights to the premises. The landlord's consent is usually required for both subleasing and assignment, and the landlord may impose conditions or restrictions on the transfer.

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Johnathan C. Bolton
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If a tenant attempts to assign and lease without the landlord's consent when it is required, the landlord will have a claim against the tenant for breach of the lease and does not have to recognize the assignment. In bankruptcy cases, consent of the landlord is usually not required for an assignment of a lease, unless there are special circumstances recognized by other law requiring such consent, such as government-related leases.

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2 Know how bankruptcy affects subleasing and assignment rights

When a tenant files for bankruptcy, it triggers an automatic stay that prevents the landlord from taking any actions to enforce the lease or recover the premises, such as terminating the lease, evicting the tenant, or suing for unpaid rent. The tenant's bankruptcy also affects the subleasing and assignment rights of the tenant and any subtenants or assignees. Depending on the type of bankruptcy and the tenant's decision, the lease may be assumed, rejected, or assigned by the tenant's bankruptcy trustee. If the lease is assumed, the tenant or the trustee must cure any defaults and perform the lease obligations. If the lease is rejected, the lease is terminated and the landlord can claim damages. If the lease is assigned, the trustee can transfer the lease to a third party without the landlord's consent, subject to certain conditions.

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Johnathan C. Bolton
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There are special rules in the Bankruptcy Code for different types of leases, so hiring an experienced bankruptcy counsel is important in these situations.

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3 Negotiate subleasing and assignment clauses in the lease

One of the best practices for handling subleasing and assignment rights when a tenant goes bankrupt is to negotiate these clauses in the lease before signing it. As a landlord, you may want to limit or prohibit the tenant's ability to sublease or assign the lease, or to require your consent and approval for any transfer. You may also want to include clauses that allow you to terminate the lease, recapture the premises, or share in any profits from the sublease or assignment in the event of the tenant's bankruptcy. As a subtenant or an assignee, you may want to ensure that your rights are recognized and protected by the landlord, and that you have the option to assume or terminate the sublease or assignment in the event of the tenant's bankruptcy.

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4 Monitor the tenant's bankruptcy proceedings

Another best practice for handling subleasing and assignment rights when a tenant goes bankrupt is to monitor the tenant's bankruptcy proceedings and stay informed of any developments that may affect your rights and interests. As a landlord, you may want to file a proof of claim for any unpaid rent or damages, and object to any motions or proposals by the tenant or the trustee that may impair your rights or reduce your recovery. As a subtenant or an assignee, you may want to file a notice of interest or a motion to intervene to assert your rights and interests, and seek relief from the automatic stay to enforce your sublease or assignment.

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5 Seek legal advice and representation

The final best practice for handling subleasing and assignment rights when a tenant goes bankrupt is to seek legal advice and representation from a qualified and experienced commercial leasing attorney. Bankruptcy law is complex and varies by jurisdiction, and subleasing and assignment rights are subject to different interpretations and outcomes depending on the facts and circumstances of each case. A commercial leasing attorney can help you understand your rights and obligations, negotiate and draft favorable subleasing and assignment clauses, protect your interests and claims in the tenant's bankruptcy proceedings, and resolve any disputes or issues that may arise.

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Johnathan C. Bolton
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An experienced bankruptcy attorney is more important than a leasing attorney when your tenant files for bankruptcy because there are many ways that your interests in the lease can be affected. Depending on the size of the lease at issue, you may want your counsel to become more involved with the bankruptcy case than simply "monitoring" it. For example, filing an administrative claim and/or a motion to compel explaining the reasons why a debtor should be paying its post-petition rent is a common practice and should be done quickly if the situation requires it.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the best practices for handling subleasing and assignment rights when a tenant goes bankrupt?

1

2

3

4

5

6

1 Understand the difference between subleasing and assignment

2 Know how bankruptcy affects subleasing and assignment rights

3 Negotiate subleasing and assignment clauses in the lease

4 Monitor the tenant's bankruptcy proceedings

5 Seek legal advice and representation

6 Here’s what else to consider

Commercial Leasing

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What are the best practices for handling subleasing and assignment rights when a tenant goes bankrupt?

1

2

3

4

5

6

1 Understand the difference between subleasing and assignment

2 Know how bankruptcy affects subleasing and assignment rights

3 Negotiate subleasing and assignment clauses in the lease

4 Monitor the tenant's bankruptcy proceedings

5 Seek legal advice and representation

6 Here’s what else to consider

Commercial Leasing

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