Limited Relief for Commercial Tenants in The Consolidated Appropriations Act of 2021

By Alexander Beeby posted 07-30-2021 15:29

  
BANKRUPTCY BULLETIN
Contributing Editors: Yuka Shiotani, Taft; Karl J. Johnson, Taft; Kesha Tanabe, Tanabe Law

The Consolidated Appropriations Act of 2021 (the “Act”) was signed into law on December 27, 2020.  The Act provides COVID-19 relief to small business debtors by modifying their obligations under 11 U.S.C. §§ 365(d)(3) -(4). 

Many states have suspended the collection of rent, or at least prohibited landlords from exercising remedies for failure to pay rent, in response to COVID-19. By contrast, Section 365(d)(3) generally requires a debtor to perform all post-petition obligations under commercial leases within 60 days of filing for bankruptcy. Moreover, the original language of §365(d)(3) prohibits courts from extending such 60-day period.  For subchapter V debtors, the Act now eases the perceived disadvantage of bankruptcy by authorizing the court to extend the deadline in Section 365(d)(3) by an additional 60 days, if the debtor can show it is “experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019.”  

If the court authorizes an extension of the 60-day period under Section 365(d)(3), the Act also provides that the deferred obligations shall be treated as administrative priority claims.  When read together with Section 1191(e), this change provides meaningful relief to subchapter V debtors.  In practical terms, a small business debtor with a dramatic loss of revenue due to COVID-19 restrictions may not only defer paying rent for the first 120 days of their subchapter V case, but such deferred rent may be repaid over 3 to 5 years under a subchapter V plan.

Prior to the Act, bankruptcy courts had produced inconsistent responses to debtor-tenants who were struggling to pay their rent due to pandemic-related restrictions.  For example, in In re: Pier 1 Imports, Inc., 615 B.R. 196 (Bankr. E.D. Va. 2020), the Court allowed a large retailer in a chapter 11 bankruptcy to “suspend” its case when it was prohibited from operating and thus indirectly, the debtor was allowed to defer rent payments well past the 60 days permitted by Section 365(d)(3).  By contrast, in In re CEC Entertainment, Inc., the Court declined to offer any relief to the debtor-tenant, holding that it had no authority to extend the deadline in Section 365(d)(3) for performance. No. 20-33162, (Bankr. S.D. Tex. Dec. 14, 2020).  For subchapter V bankruptcy cases, the Act creates clarity about what discretion courts have to grant relief to commercial tenants affected by the pandemic.

The Act also amends § 365(d)(4).  Under the original language of § 365(d)(4), a commercial lease was deemed rejected, if the debtor did not assume (or extend its deadline to assume or reject) within 120 days.  The Act extended this time period to 210 days. The amendment does not, however, modify the rules for seeking an extension of such time period.

The aforementioned amendments will sunset on December 27, 2022, but will continue to apply in any subchapter V case commenced before the sunset date.

Sources:

  1. 11 U.S.C. § 365 – Executory contracts and unexpired leases
  2. Consolidated Appropriations Act of 2021, H.R. 133
  3. Brian Huben, Ballard Spahr, “New Stimulus Deal: Amendments to the Bankruptcy Code”
  4. Karl Johnson, Taft Stettinius & Hollister, “Bankruptcy Courts Have Allowed Retail Tenants to Defer Rent Payments”

Co-Editors in Chief
Alexander J. Beeby, Larkin Hoffman Daly & Lindgren Ltd.
Kesha Tanabe, Tanabe Law

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