Consolidated Appropriations Act, 2021 Amends Bankruptcy Code to Assist Commercial Tenants

By Salene Mazur Kraemer
Partner, Bernstein-Burkley, P.C.

It’s an understatement to say that COVID-19 has caused “global shock.” Everything the virus touches has been marked by uncertainty, whether it comes to its path, duration, or magnitude. In some capacity, no one has been immune to it and that includes commercial clients. The March 2020 U.S. government shutdown orders drastically changed businesses’ ability to pay their rent on time, and the Bankruptcy Code does not allow debtors to adjust the terms of property leases.

Congress, however, recently implemented the Consolidated Appropriations Act, 2021 (“CAA”), which includes $2.3 trillion and was signed into law on December 27, 2020. Under the CAA, businesses and individuals are provided with additional COVID-19 relief, including nine amendments to the Bankruptcy Code, three of which affect commercial tenants.

In the Bankruptcy Code, a debtor is required to adhere to rental responsibilities during the bankruptcy case. The recent enactment of the CAA expands bankruptcy court and debtor discretion to obtain relief when it comes to commercial leases. These are the three amendments:

1. CAA amends section 365(d)(3) to allow courts to extend the time for performance of lease obligations. Generally Section 365(3)(3) extensions are given not beyond 60 days after the petition date, but the CAA has prolonged potential relief by an additional 60 days, meaning 120 days total, but only for small business debtors filing under subchapter V of Chapter 11 who continue to experience material financial hardship because of the coronavirus.

2. CAA amends section 365(d)(4) to extend the initial deadline for a debtor to assume or reject an unexpired lease of nonresidential real property by an additional ninety (90) days to a total of two hundred and ten (210) days after the petition date. A debtor could potentially have as many as 300 days to decide whether to assume or reject an unexpired commercial lease without the consent of the landlord.

3. The CAA also strives to incentivize a distressed company’s landlords and vendors to provide flexible payment schedules by adjusting the preference provisions of section 547 to say that any “covered payment of rental arrearages” cannot be avoided as preferences. “Covered payments” are defined as payments made pursuant to arrangements entered into between the debtor and landlord on or after March 13, 2020, to delay payments owed under a lease.

The amendments to section 365(d)(3), allowing courts to extend the time for performance under a commercial lease, are limited to subchapter V small business debtors. The other two amendments apply to all debtors. The CAA includes a two-year sunset after enactment, upon which the above amendments will be struck from the Bankruptcy Code on December 27, 2022.

Notably, if a commercial debtor-tenant wants to assume a lease, then they are still responsible for all back rent, as Section 365(b) requires that the tenant cure, or provide adequate assurance of prompt cure, of any default under the lease.

By enacting these amendments to the Bankruptcy Code, the CAA provides a measure of relief to debtors suffering from COVID-19-related financial distress.

Written by Bernstein- Burkley, P.C. on January 22, 2021

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