Given the spate of bankruptcies filed over the last few years, including by large-scale tenants such as Borders, Linens 'n Things, and Circuit City, and the tenuous financial condition of big-box retailers such as Best Buy, it is important for both landlords and tenants to understand the benefits and limitations of bankruptcy protection as it relates to the status of a bankrupt tenant’s leasehold interest. It is clear that, when it comes to the issue of lease termination, federal courts sitting in bankruptcy look to state law to determine the property rights in the assets of a bankrupt’s estate. Therefore, even as between New York and New Jersey, the rule differs as to when a lease is considered terminated after a monetary default.
“The bright-line rule for bankruptcy courts applying New Jersey law is that the judgment for possession terminates [a] nonresidential lease, not the issuance of the warrant for removal.” In re Seven Hills, 403 B.R. 327, 332 (Bankr.D.N.J. 2009) (citing In re Great Feeling Spas, Inc., 275 B.R. 476, 477 (Bankr.D.N.J. 2002); In re DiCamillo, 206 B.R. 64, 67 (Bankr.D.N.J. 1997)). However, the New Jersey Anti-Eviction Act provides that a tenant may cure a default in rent payments “at any time on or before the entry of a final judgment.” N.J.S.A. §2A:18–55. Therefore, even if a commercial lease provides that in the event a tenant defaults thereunder, the landlord may terminate the lease upon a certain number of days’ notice, such termination shall not be effective if such tenant files for bankruptcy prior to a final judgment being entered in favor of the landlord. Rather, the lease would be considered a part of the tenant’s bankruptcy estate and may be assumed under the Bankruptcy Code. Therefore, as a commercial landlord, it is imperative to pursue judicial remedies as quickly as possible if you seek to terminate a lease prior to a tenant’s potential bankruptcy.
Unlike New Jersey, New York state law defers more toward the express terms of the underlying lease. While forfeitures are anathema to New York courts, “a lease may be terminated under New York State law by operation of a conditional limitation. In this manner, the landlord sends the tenant in default a Notice of Termination of Lease, stating that the lease will be deemed terminated upon a specified date due to tenant's default. The lease is thus terminated upon the mere lapse of time, rather than on any further act by the landlord.” In re Musikahn Corp., 57 B.R. 938, 940 (Bankr.E.D.N.Y 1986) (citations omitted). The courts note that any such termination must be implemented in strict accordance with the underlying lease (i.e., all terms and conditions of such termination must be met, the appropriate lease sections referenced, etc.) and differs from leases that provide the landlord with an option to terminate the lease if a default occurs. While the difference in the required wording of the lease may be subtle, it is critical to both a landlord and a tenant because it may be determinative as to whether the bankrupt tenant retains a leasehold interest in the applicable premises or solely an equitable, possessory interest in the premises.
The question then arises as to when a lease is deemed terminated under New York law if the conditional limitation fact pattern is not applicable. Somewhat similar to New Jersey law, the issuance of a warrant of eviction terminates the landlordtenant relationship. In re Sanshoe Worldwide Corp., 139 B.R. 585, 594 (Bankr.S.D.N.Y. 1992) (citations omitted). However, until that warrant is executed, the tenant retains a possessory interest in the premises (although the landlord-tenant relationship no longer exists) and the automatic stay applies to such interest. In re P.J. Clarke’s Restaurant Corp., 265 B.R. 392, 399 (Bankr.S.D.N.Y. 2001) (citations omitted). Furthermore, an unexecuted warrant of eviction may be vacated by a court for good cause. New York RPAPL § 749. The brief discussion above se
The brief discussion above serves to highlight the ability of tenants – insolvent or not – to maintain a leasehold interest even after default, regardless of what the lease itself might say.