A commercial landlord’s failure to terminate properly a commercial lease can lead to long drawn-out legal battles between the commercial landlord and tenant, before and after the tenant files for chapter 11 bankruptcy protection. In particular, a commercial landlord’s failure to elect and effectively pursue its remedy of lease termination may preclude any subsequent action in bankruptcy to gain possession of the premises even after a writ of possession has issued.
The chapter 11 bankruptcy case of In re 2408 W. Kennedy, LLC, 512 B.R. 708 (Bankr. M.D. Fla. 2014), illustrates this scenario. The tenant owned and operated a nightclub and leased that location from the landlord but failed to pay the required monthly rent due under the lease. The landlord notified the tenant of its failure to pay the required rent under the lease in a notice which also alleged that the lease was “no longer in effect” and that the tenant was “occupying the premises as a Tenant at Will.” The landlord then insisted that the tenant continue paying rent going forward under the purported month-to-month tenancy. The tenant apparently failed to pay rent so the landlord served the tenant with a three-day pay-or-quit notice, notifying the tenant it owed past-due rent and that it had three days to bring the past-due rent current or vacate the premises. When the tenant failed to pay the past-due rent demanded, the landlord sued to recover possession of the premises in state court.
The state court entered an order obligating the tenant to pay the past-due rent into the court registry and notifying the tenant to continue paying the monthly rent into the court registry while the eviction action was pending. The order expressly provided, consistent with section 83.232, Florida Statutes, that any failure to timely pay the past-due rent or future rent into the court registry would constitute an absolute waiver of the tenant’s defenses to the landlord’s claim for possession.
The tenant paid the past-due rent, but failed to timely make one of its ongoing rent payments, so the state court entered a default judgment for possession and the clerk of court issued a writ of possession that same day. The tenant immediately sought a stay of the writ of possession but the state court ruled that the landlord was entitled to possession of the premises and ordered the tenant to vacate the premises. One day before the deadline for vacating the premises expired, the tenant filed for bankruptcy.
The landlord then sought to dismiss the bankruptcy case as a bad faith filing and moved for stay relief so the landlord could retake possession of the premises. In support of stay relief, the landlord argued that the tenant, now a debtor, could not assume the lease since the lease was terminated prepetition. The landlord contended the lease was terminated twice: first, when the landlord notified the tenant of its alleged default and second, when the state court entered its final judgment for possession and the clerk of court issued a writ of possession.
Bankruptcy Judge Michael G. Williamson disagreed and found that the lease was not terminated.
As to the landlord’s second argument, Judge Williamson explored whether a lease is terminated upon either the entry of a final judgment for possession or issuance of a writ of possession. His answer was that neither terminates a lease. He reasoned that several courts (all bankruptcy courts located in the Middle District of Florida) have held that the mere issuance of a writ of possession, without more, does not preclude a debtor from assuming a lease as an executory contract under Bankruptcy Code § 365.
To understand why, Judge Williamson considered the remedies traditionally available to a landlord in the event of default. Judge Williamson noted that a landlord in Florida ordinarily has three remedies in the event of default: (1) the landlord may terminate the lease and retake possession of the premises for the landlord’s own use; (2) the landlord may retake possession of the premises on account of the tenant and hold the tenant accountable for the difference between the rent that was due under the lease and the rent actually received from a replacement tenant during the remainder of the lease term; and (3) the landlord may hold the tenant liable (i.e., sue the tenant) for each payment as it becomes due. Only the first remedy involves terminating the lease.
As explained by Judge Williamson, by affirmatively terminating the lease and retaking possession of the premises for its own use, a landlord cuts off the tenant’s obligation to pay any future rent under the lease. If the landlord simply retakes possession of the premises on account of the tenant, the tenant’s obligation to pay the rent due for the duration of the lease term remains. Regardless of which remedy the landlord elects, the writ of possession merely affects the tenant’s right to possess the property. So it is only a landlord’s affirmative act of electing to terminate a lease—not entry of a judgment for possession (i.e., an eviction judgment) or issuance of a writ of possession—that assists the landlord under Bankruptcy Code § 365.
In the end, because the lease had not yet been terminated, Judge Williamson found that the tenant still had a property interest in the leased property sufficient for the lease to be assumed under Bankruptcy Code § 365. He recognized that “[u]ntil the writ of possession is executed, the tenant has a right to retain possession of the leased premises.” The Judge therefore denied the landlord’s motion for stay relief to the extent it sought a determination that the lease was terminated prepetition and denied authorization for the landlord to conclude the eviction proceedings by having the sheriff execute the writ of possession.
There is authority going the opposite way. In In re Key Largo Watersports, Inc., 377 B.R. 738 (Bankr. S.D. Fla. 2007), Bankruptcy Judge Robert A. Mark recognized that a “judgment of eviction does not necessarily terminate a lease for all purposes” but then concluded that the judgment for eviction in the Key Largo case precluded the debtor from assuming a lease in bankruptcy because he found that the judgment for possession terminated the debtor’s right of possession. Judge Mark explained that when the tenant’s right to possession is extinguished by the judgment for possession, the lease is expired and cannot be assumed under Bankruptcy Code § 365. Judge Williamson, in 2408 W. Kennedy, expressly disagreed with this conclusion, calling it “erroneous” because he found that it is execution of the writ of possession, and not the judgment for possession, that dispossesses the tenant under Florida law.
Given these two divergent positions on a question of law, landlords and tenants in the bankruptcy context must carefully examine the authority in their jurisdiction to determine whether a commercial lease agreement and a tenant’s right to possession of the leased premises have been effectively terminated pre-petition. Failing to do so can lead to unanticipated result.