What happens when your tenant’s temporary closure becomes a permanent closure? How does a landlord participate in the bankruptcy process?  Our upcoming webinar with bankruptcy attorney William Fennell will answer some often asked and hard-to-answer questions about landlords’ rights and bankruptcy law.

For now, I must stick to simpler reactions to your tenant’s business closing permanently.  You expect it to mean they will not be paying the past-due rent anytime soon, maybe never. If a landlord plans ahead for the possibility of the tenant going out of business, there are tools that may be used to collect unpaid rent.

The first question I ask a landlord client is whether the lease included a personal guaranty from the business entity’s owner. If so, then there may still be hope of collecting. Initially, an asset search using public records may wield useful information.

Another important question is whether the tenant completed a full application and went through the application process prior to signing a lease.  If so, the records from that application may hold valuable information leading to opportunities to collect some of the past-due rent.  For example, are there any other locations where the tenant was doing business?  Were there any inaccuracies or misrepresentations that might provide and opportunity to pierce the corporate veil and hold the owners personally responsible for the debts?

The type of business assets maintained on the premises may also be of concern, or of use!

The tenant’s business equipment and assets can create problems or may be turned into opportunities. What type of equipment does the tenant maintain in the premises?  Does all the equipment belong to the tenant?  Did the landlord provide any of the equipment or improvements?  Are there liens against any of the equipment pursuant to the California Uniform Commercial Code (i.e. U.C.C. liens)? Does the landlord hold an interest in any of the business assets?

For example, ABC Brewery goes out of business.  The business owners are unable to remove the giant metal vats used in the fermentation process. This equipment is expensive to move, and expensive to store.  An opportunity may arise if another brewery is looking to expand and may purchase the equipment so that it can remain in place.  This depends on whether there are UCC liens against the equipment that can be paid off or assigned to a third party, and whether the defunct tenant is willing to work with the landlord to make the sale happen.

Another example is a restaurant.  Restaurant equipment from a tenant who has gone out of business may be repurposed by a new tenant or sold. If there are no liens or encumbrances on the equipment, and the defunct tenant has apparently abandoned it, a landlord may claim the abandoned property using a simple statutory form called a Notice of Right to Reclaim Property.

We expect to see many real-life examples of this as many businesses turn their temporary closure into permanent closure. We are seeing the beginning of a trend that will be regular news for the extended future – businesses filing Chapter 11 and Chapter 13 bankruptcy. For example, JC Penny, Pier 1, 24 Hour Fitness, and Hertz, have already filed.  We might see Chuck E. Cheese’s soon.  Legislation like California SB 939, if passed, could result in an increase of landlord bankruptcies as tenants become able to terminate their leases.

Please tune in to our webinar on June 25 as our friend and colleague, bankruptcy attorney William Fennell, explains how landlords participate in the bankruptcy process when a tenant goes out of business and files for relief.

Shanna Welsh-Levin is a California Real Estate Attorney who assists Realtors®, investors, and homeowners with real estate sale transactions and litigation. She authored legislation that became the California short sale anti-deficiency statute, Cal. Code of Civil Procedure §580e. Her firm, So. Cal. Realty Law, resolves real estate disputes and protects real estate investments.  Services also include managing risk for real estate brokers and preventing future liability.