Generally, if a landlord terminates the lease, such termination cuts off the landlord's damages at the date of termination. Therefore, if a landlord terminates the lease on January 1, 2023, the landlord cannot recover future damages beyond January 1, 2023. By contrast, if a landlord terminates only the tenant's right to possession, the landlord can still periodically sue for rents as they come due. Further, if a landlord sues to evict the tenant but does not terminate the lease, the suit for eviction does not terminate the lease.
So, whether a landlord seeks to terminate a lease, or terminates right of possession, or chooses neither when seeking to evict a tenant can have consequences if the tenant files bankruptcy.
Application of Sunset Opportunities
Though Sunset Opportunities B2, LLC v A&E Adventures LLC (In re A&E Adventures), No. 21-24432, 2023 U.S. Dist. LEXIS 55429 (S.D. Fla. March 30, 2023), is a Florida bankruptcy case, the ruling is equally applicable in many states including Texas. There, the debtor/tenant filed bankruptcy the day its landlord obtained an order to evict the debtor/tenant. Later, the landlord filed a motion to lift the stay to evict the debtor as the landlord was otherwise "stayed" from doing so by virtue of the debtor/tenant filing bankruptcy. The court denied the motion ruling that because the lease had not been terminated, the debtor/tenant could still assume the unexpired lease and cure the default. The bankruptcy court found that the landlord had several options when the debtor/tenant defaulted. It could have terminated the lease and waived future damages, terminated right of possession and make a claim for damages or do nothing, which is what the landlord chose to do, i.e., the landlord only sought possession by court order. Yet, the sheriff had not yet served the writ of possession. Had the writ been served prior to bankruptcy, the outcome may have been different as the debtor/tenant would have lost possession of the property.
With the lease being treated as an executory contract, which can be assumed and assigned during the course of the bankruptcy case, pursuant to Section 365 of the Bankruptcy Code. Though there are a number of definitions of an executory contract, for simplicity, the one most commonly used is known as the "Countryman" definition, i.e., an executory contract for bankruptcy purposes as "a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other."
Deadlines to Assume or Assign a Lease
Now, the debtor is not necessarily free to do as it pleases simply by filing bankruptcy before the lease has been terminated as there are time constraints and requirements to perform under the lease after the bankruptcy has been filed. For example, per Section 365(d) of the Bankruptcy Code, there are deadlines for a debtor or trustee to assume and/or assign a lease. Under a Chapter 7 liquidation case, the trustee must assume an executory contract within 60 days of the filing of the bankruptcy. See Section 365(d)(1). Further as for residential leases, there is no time period to assume and/or assign a lease in cases under Chapter 9 (municipal bankruptcies), 11 (reorganization), 12 (family farmer or family fisherman), and 13 (Individual Reorganization). The trustee or debtor/tenant may assume or reject the lease any time prior to confirmation of a plan, but on request of a landlord, the bankruptcy court may require the debtor/trustee to assume or reject the residential lease within a specified time period. See Section 365(d(2). Further, the trustee/debtor must timely perform the lease obligations until the lease is assumed or rejected and for cause, may seek an additional 60-day extension to perform. See Section 365(d)(3). Notwithstanding anything else, the trustee/debtor must assume or reject the lease within 120 days of the filing of the bankruptcy and for cause may extend the 120-day period an additional 90 days but only once unless the landlord consents to an additional extension. See Section 365(d)(4).
As one can see, if a landlord fails to terminate a lease or obtain possession of the premises by virtue of the Sherriff serving the writ, the debtor/tenant may be able to buy some time to cure the default and assume and perhaps assign the lease by fling bankruptcy. Therefore, the landlord should carefully consider the ramifications and likelihood of collecting future damages against debtor as opposed to terminating the lease by providing the notice required by the lease and moving on to lease to another tenant.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
