You Ask: What Happens to Commercial Leases during bankruptcy

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Being served is not fun.Question:
I signed a commercial lease agreement under my personal name. My business was investigated by the State, and the ensuing investigation ended up bankrupting the company. I have all legal documents showing we are bankrupt. However, there is still a substantial amount of time left on the commercial lease. Can I show that because of the bankruptcy, I should be let out of the lease?

Answer:
Let’s go over the basics of Bankruptcy and how it affects a business’s obligations. Chapter 7 bankruptcies refer to the type of bankruptcy in which the owners of the business want to dissolve the business. It is believed that whatever damage has been done is irreparable. In this case, the courts will assign a trustee to liquidate the debtors assets in order to pay back the creditors. (At least, whatever amount is possible to be paid back.)

A Chapter 11 bankruptcy occurs when the company wants to try to and stay solvent. The court also appoints a trustee to determine what can be paid back to the creditors that would be more than what they would have received in a liquidation. If a business is unable to regain good financial ground, it can be converted to a Chapter 7 bankruptcy.

In your case, the company is bankrupt, and has been liquidated. Your argument is that because of that, you shouldn’t have to pay the rent on a business lease.

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Had the lease been signed as the business, this would have been dealt with during the bankruptcy process. When you filed bankruptcy, you would have the option to “assume” or “reject” the remainder of your unexpired commercial lease. To assume it, means that you would re-affirm your intent to fulfil the obligation, pay on any defaults, and prove that you were able to continue fulfilling your end. However, a rejection of the lease allows you to terminate it. This would give the landlord the ability to file a claim against the debtors estate for the amount of the unexpired contract (and any monies you had failed to pay.)

Unfortunately, because it was signed as an individual, you are responsible as an individual for the remainder of that lease. The bankruptcy of the company has nothing to do with your obligations to fulfill the rental agreement.

You could work with a lawyer or negotiation service company to attempt to resolve the issue, however there are no guarantees.

This is a very complicated issue and this article only goes over the basics. Make sure that you speak with an experienced business or real estate attorney before taking any action. This is post should not be construed as legal advice, and is for information/reference purpose only.

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