Commercial Lease Security Deposit At Risk In Bankruptcy

If you are a tenant in a commercial lease, your security deposit may be at risk if the landlord files for bankruptcy

Q: I have a commercial lease for a portion of a strip building and just found out the building owner filed for bankruptcy last February. His loan holder is currently trying to sell the building. The building is in Milton, Georgia. I couldn’t find anything in my lease about any of these following questions.

Am I obligated to pay the owner his rent during his bankruptcy?  I have been paying my rent so far because I just found out about this. Should I pay his bankruptcy servicer instead?  Or do I get “free rent” during the foreclosure process as I have been told? Will the building purchaser have to honor my lease? What happens to my security deposit?

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I just want to be informed of the law on these items, but am not asking for legal advice.

A: Even though your landlord is in bankruptcy, you still have to make your monthly rent payments under your commercial lease. But you’re smart to think about who should get that check. In most cases involving bankruptcy proceedings, you will get a notice from the court indicating whether a receiver or other person has been put in place to manage the property and telling you who gets your rent check.

You never have a “free” rent period when you rent property and your lease provides for a payment amount that is due. Your lease obligates you to pay rent on a monthly basis and if you fail to pay rent, your landlord has the right to give you notice and evict you from your space.

You should talk to a real estate attorney and get some real estate advice and talk about the specifics of your situation and go over any documentation you have received from the bankruptcy court.

The good news is that any purchaser of the building is usually happy to keep current tenants in place. A fully leased and occupied building is better than a building that is vacant. However, the bankruptcy court has wide latitude in deciding whether to keep leases in place and it is possible that the bankruptcy court would terminate leases at the property to allow a different use or a sale of the building.

If the building is sold with the leases in place, the subsequent buyer is generally required to honor the leases in place for their term. But if the bankruptcy results in the lender taking over the building, the lender could remove some or all of the tenants in the building.

If during your time in the building you obtained a document from the lender that the lender would keep you as tenant so long as you are not in default under your lease, you are safe. But if you did not and your lender granted your landlord a loan before you became a tenant at the property, the lender may not have a legal obligation to honor the lease.

The bad news is that your security deposit might be lost. In many cases, commercial leases provide for the security deposit to be given to the building owner and the building owner has the ability to commingle the money with other money used for the operation of the building. When money is commingled and the owner files for bankruptcy, you, as a tenant in the building, may become an unsecured creditor of the landlord and if there are no funds to pay off unsecured creditors, you may lose that security deposit.

If you wind up with a subsequent landlord in the building, that landlord may decide (for goodwill purposes) to honor the security deposit you had under your lease. The new landlord may not have a legal obligation to honor that amount owed unless the laws in your state provide that a security deposit payment to a landlord must be honored by a subsequent landlord or owner of the building.

There may be differing scenarios for your circumstances, and for these reasons you might want to discuss this issue further with a real estate attorney, particularly if the security deposit you gave the landlord is a substantial.


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