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

Commercial leases in New York City,
COVID-19, Recent Protests and a
Strategy to Terminate
Commercial 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 end
or 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 individuals and businesses 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:
phone: 212-541-6224
or email: jshenwick@gmail.com

We look forward to hearing from you