Commercial leases in New York City, COVID-19, Recent Protests and a Strategy to Terminate Commerical Leases

As a result of COVID-19, recent protests and the advent of technologies such as Zoom and Google Meet, many tenants have excess office space/s that they cannot or do not want to continue to rent  and would   like to terminate their lease or stop paying rent.

At Shenwick & Associates, we have received many calls from clients with these issues and we have developed a strategy to address them.

First, we review the company's financial information including a recent balance sheet, income statement,  the commercial lease and guaranty, if any.

Second, we determine if the company is a candidate for a bankruptcy filing, either chapter 7 (a liquidation where the company closes as a result of the filing), a small business Subchapter 5 bankruptcy filing, or a full-blown chapter 11 business bankruptcy filing.

In the case of a Chapter 7 filing, the lease will terminate; however, the Chapter 7 bankruptcy trustee appointed to the case will also liquidate or close the business. For businesses that are losing money or do not see a bright future, this may be a good strategy.

A company that wants to remain in business, but terminate or reject their lease, should consider a bankruptcy filing under  new Subchapter 5, which is a fast-paced, less costly chapter 11 business bankruptcy filing. As part of a Subchapter 5 bankruptcy filing, the lease can be rejected, and the landlord would be paid their lease rejection damages and other monies owed over 5 years or less from disposable income of the business.

If Subchapter V does not work due to the debt limit of $7,500,000 or for other reasons, a company can consider a full-blown chapter 11 bankruptcy filing. However, they would want to consider the cost from a chapter 11 filing, versus the expected savings from rejecting the lease. Chapter 11 is a complicated, risky and expensive process for many companies.

Another strategy that we have been using with much success is preparing a bankruptcy petition, without filing the petition (a so called Pro-Forma Bankruptcy Petition). This bankruptcy petition would accurately disclose the assets, liabilities and earnings of the company. Then we would forward that bankruptcy petition to the landlord or their counsel indicating that if the tenant and landlord cannot reach an agreement where the tenant is allowed to terminate their lease (pursuant to a Lease Surrender Agreement), then the tenant or company will file for bankruptcy. The benefit of this strategy is that it is quick, relatively inexpensive, the landlord gets financial disclosure regarding the company or tenants finances upfront without litigation or discovery and we convince the landlord that releasing the tenant from their lease is a “win-win” for both the tenant and the landlord.

How is this strategy a win for the landlord? The landlord keeps the tenant’s security deposit, the Landlord will also  save substantial money on bankruptcy and landlord tenant legal fees, they remove an unprofitable tenant from their building, and they obtain possession of the premises quickly allowing them to re-let the space.

One of the reasons that we have had much success with this strategy in these trying times is that we have been filing  bankruptcy petitions  for over 20 years and the landlord or their counsel can Pacer our law firm’s bankruptcy filings, or visit our website and blog.

Based upon our work and experience in this area of the law, landlords realize that bankruptcy is a real option for the tenant not an idle threat. Clients or their advisors who would like to discuss these strategies with Jim Shenwick or schedule a consultation can reach him at 212-541-6224 or email him at jshenwick@gmail.com

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