Can you eliminate your rent costs in a business bankruptcy?

Business bankruptcies can help a company restructure if there is potential for it to continue operating. In situations where future operations seem impossible, bankruptcy can also be a way for the company to discharge its debts as it begins the process of dissolution.

Whether you hope to continue the company or need to shut it down, it’s likely that the rent you paid for your commercial facilities is among your most expensive ongoing business obligations. You may pay hundreds or thousands of dollars per month for space, as well as common area maintenance fees for parking lots, bathrooms and security shared with other businesses.

When your revenue drops, meeting those costs every month can prove an impossible hurdle for your company. Is it possible to eliminate commercial lease obligations in a business bankruptcy?

The business filing can choose how to handle the lease

Under federal bankruptcy law, companies have to make decisions about executory contracts that have future obligations for the business. Rental contracts fall into this category. Typically, commercial tenants filing for bankruptcy will either need to assume or reject the lease.

If they assume the lease, they can negotiate terms with the landlord to repay past due rent or make other arrangements that minimize the impact on the landlord. Sometimes, landlords can be flexible with tenants trying to regain financial control; other times, they are less helpful. If the landlord won’t work with you, rejecting the lease might be the better option.

If the business rejects the lease, the obligations under the lease will end. However, the landlord still may be able to bring a claim against the tenant for a portion of the past due rent and future rent owed under the contract. A review of the lease will give you a better idea about how much a landlord could claim if you choose to reject your lease during bankruptcy proceedings. The kind of bankruptcy that you file will also impact what claims the landlord can bring against you.

Navigating bankruptcy when your company either needs to cease operations or restructure to keep doing business often requires support. The better you understand the process, the easier it will be to maximize the benefits you derive from your filing.