What Should Landlords Do When a Commercial Tenant Files for Bankruptcy?

By R&E's Andrew R. Gottesman

In 2024, commercial bankruptcy filings surged 30% higher than the year-over-year average from 2005–2023. Within just the past two months, three major retailers—Party City Holdings Inc., The Container Store Inc., and JOANN Inc.—have filed for Chapter 11 bankruptcy, leading to lease assignments, going-out-of-business sales, and reorganization efforts.

For landlords, a tenant’s bankruptcy filing can be a major disruption—impacting rental income, lease agreements, and long-term financial planning. However, understanding your rights and taking the right steps can help you protect your interests and minimize financial losses. Here’s what every commercial landlord should do when a tenant files for bankruptcy.

📌 Key Steps Landlords Should Take

• Assess the Type of Bankruptcy – Determine whether it’s Chapter 7 (liquidation) or Chapter 11 (reorganization).
• Review Your Lease Agreement – Understand your rights regarding defaults, lease assumptions, and assignments.
• Understand the Automatic Stay – Be aware of legal restrictions on eviction and collection efforts.
• Evaluate Lease Assumption vs. Rejection – Know what happens if your tenant continues under the lease or walks away.
• Monitor the Bankruptcy Process – Keep track of deadlines, hearings, and creditor meetings to protect your interests.
• Prepare for Tenant Departure – Have a plan for re-letting the space and mitigating financial loss.
• File a Proof of Claim – Ensure you submit a claim for unpaid rent and damages by the court’s Bar Date.
• Consult a Bankruptcy Attorney – Work with a legal expert to navigate complex bankruptcy proceedings.

1️⃣ Determine the Type of Bankruptcy

Before taking any action, find out which type of bankruptcy your tenant has filed:

• Chapter 7 (Liquidation): The tenant ceases operations, assets are liquidated, and the lease is typically rejected.
• Chapter 11 (Reorganization): The tenant attempts to restructure debt, assign leases, or sell assets. Some businesses continue operating while others eventually liquidate.

💡 Why It Matters: In Chapter 7, you’ll likely need to re-let the space quickly. In Chapter 11, there may be opportunities to renegotiate lease terms or recover unpaid rent.

2️⃣ Review Your Lease Agreement

Once you confirm the bankruptcy filing, review your lease agreement to understand your rights and obligations. Key provisions to analyze include:

• Default & Remedies Clauses – Determines what actions you can take if a tenant fails to pay rent.
• Termination Date – Helps assess remaining lease value and impact on bankruptcy proceedings.
• Assignment & Subletting – The tenant may have the right to assign the lease despite your consent.
• Rent, Additional Charges & Security Deposits – Review arrears, fees, and how deposits can be applied.

💡 Why It Matters: If your lease has below-market rent, it may be valuable to the tenant or other potential buyers—potentially leading to lease sales or renegotiations.

3️⃣ Understand the Automatic Stay

A bankruptcy filing triggers an automatic stay, which halts eviction proceedings and rent collection efforts unless an exception applies:

When the Automatic Stay Applies:

• You cannot evict the tenant or demand payment unless the court grants an exception.

When the Automatic Stay Does NOT Apply:

• The lease terminated before the bankruptcy filing.
• The tenant is damaging the property or breaking the law.
• You file a motion to lift the stay (e.g., tenant fails to pay post-bankruptcy rent).

💡 Why It Matters: Understanding the automatic stay’s limitations can help you determine whether you can legally reclaim your property sooner rather than later.

4️⃣ Lease Assumption vs. Rejection

Under Chapter 11 bankruptcy, a tenant has 210 days to decide whether to assume (keep) or reject (walk away from) the lease.

Lease Assumption (Tenant Keeps Lease)

• Tenant must cure all defaults and prove they can pay rent moving forward.
• Lease may be assigned to a third party, even if your lease says otherwise.

Lease Rejection (Tenant Walks Away)

• Tenant abandons the space, and the lease is terminated.
• You can file a claim for unpaid rent and damages (capped by bankruptcy law).

💡 Why It Matters: If the lease is valuable, you may be able to negotiate better terms or benefit from a lease auction. If rejected, act quickly to re-let the space.

5️⃣ Monitor the Bankruptcy Process

• Track Important Deadlines – Key court dates, including the assumption/rejection deadline and claim filing deadlines.
• Understand the Tenant’s Plan – Will they continue operations, sell the business, or liquidate?
• Review Court Filings – Stay updated on lease auctions, going-out-of-business sales, and potential disputes.
• Participate in Creditor Meetings – Landlords may have voting rights in creditor committees.

💡 Why It Matters: Bankruptcy courts approve major decisions, including lease sales and reorganization plans. Active involvement helps protect your financial interests.

6️⃣ Prepare for Tenant Departure

Even if your tenant continues operating temporarily, their bankruptcy increases the risk of vacancy. Take proactive steps:

• Start Marketing the Space – Consider potential new tenants in case of lease rejection.
• Ensure Property Maintenance – Keep the space in rent-ready condition.
• Plan for Financial Shortfalls – Be prepared to cover expenses without rental income.

💡 Why It Matters: A vacant space can lead to significant financial losses, so having a backup plan is crucial.

7️⃣ File a Proof of Claim

If your lease is not assumed and fully cured, you must file a proof of claim to recover unpaid rent and damages.

• Bar Date: The bankruptcy court will set a deadline for claim submissions—miss it, and you forfeit your claim.

💡 Why It Matters: Filing a timely and accurate claim ensures you get your fair share of any bankruptcy distributions.

8️⃣ Consult a Bankruptcy Attorney

Commercial tenant bankruptcies are complex, and landlord rights are subject to bankruptcy court approval. Consulting a real estate-focused bankruptcy attorney can:

• Protect your lease rights during negotiations.
• Navigate automatic stay motions and eviction actions.
• Maximize claim recovery through strategic filings.

💡 Why It Matters: Bankruptcy laws are intricate and highly procedural. Working with an attorney helps protect your financial interests and avoid costly missteps.

🏁 Final Thoughts

A commercial tenant’s bankruptcy can be challenging, but landlords who stay informed and proactively manage the situation can minimize financial losses and even find new opportunities.

• Monitor the case closely to protect your lease rights.
• Consider renegotiation if the lease has market value.
• Work with a legal expert to ensure compliance with bankruptcy law.

📞 Need Guidance on a Tenant Bankruptcy?

Rosenberg & Estis, P.C. has decades of experience representing landlords in bankruptcy proceedings. Contact us today to ensure you’re making the best strategic decisions in this challenging landscape.