Does Bankruptcy Mean a Tenant Can Stay Longer?

As retailers’ Paycheck Protection Program funds are running out, Luis Martinez-Monfort, founding partner of law firm Gardner Brewer Martinez-Monfort, expects to see more of them telling their landlord that they’re unable to pay rent.

“I feel like PPP has just been a band-aid over the wound, and it’s just going to rip off pretty soon,” Martinez-Monfort says. “Then you’re going to have a festering wound, and you’re going to have to deal with that. People are going to resolve the situation by being creative or the bankruptcy system is going to come into play for entities where they can reorganize and restructure.”

“Bankruptcies trail the economy,” he adds. “When PPP is exhausted, other creative solutions to problems and creative credit issues have to be exhausted before you really go into bankruptcy. And so there’s a little bit of a lag.”

Martinez-Monfort is in the Tampa market, where he says the real estate market is still strong with a development boom that he expects to continue.

“We’re starting to see an uptick in what I do in regards to creditors’ rights,” Martinez-Monfort says. “You are starting to see a litigation uptick. I’ve already handled multiple commercial evictions that have resolved themselves throughout this summer.

So far, Martinez-Monfort says he hasn’t seen a lot of really creative solutions to landlord-tenant disputes. But he does think landlords are taking a realistic view of the situation. While they may want to help, their flexibility is determined by what their lender allows them to do.

“If the landlord can’t make the loan payments, that’s not the tenant’s problem,” Martinez-Monfort says. “The tenant’s obligation is confined by the lease. But that comes into the equation of how flexible the landlord can be. The landlord that fully owns his property is more flexible than a landlord that has leveraged his property.”

Martinez-Monfort says the bankruptcy process can actually allow the tenant to stay in its space longer. “They might go into bankruptcy with a working business model,” Martinez-Monfort says. “They can pay their regular monthly payments, and they have to while they’re using the lease space in bankruptcy. All they need is for the judge to approve a plan to pay back the arrears–the five or six months they haven’t paid. They are going to pay that back over time. So they’re forcing a landlord in that scenario into a bankruptcy restructuring process.”

When a tenant goes into bankruptcy, Martinez-Monfort says there are usually multiple reasons. “If a tenant files for bankruptcy, it’s not always just a landlord-tenant dispute,” Martinez-Monfort says. “That tenant probably has his own issues. Usually, there is something else going on.”