At the end of 2020, Congress enacted the Consolidated Appropriations Act, 2021, partially in response to the COVID-19 pandemic and resulting economic crisis. While funding the federal government and preventing a government shutdown, the CAA also included several amendments to the bankruptcy code providing much-needed rent relief for commercial tenants.
The bankruptcy code generally requires a debtor in bankruptcy to timely pay its rental obligations during the bankruptcy case. Prior to enactment of the CAA, commercial tenants and debtors in bankruptcy tried with varying degrees of success to secure rent abatement during their bankruptcy cases. Providing a new degree of certainty, Congress has provided debtors in bankruptcy specific forms of temporary relief.
First, the CAA amends the bankruptcy code to provide bankruptcy courts with flexibility to extend the time for performance of lease obligations. Prior law only allowed a bankruptcy court to provide rent abatement and other forms of relief for sixty (60) days after the petition date. However, the CAA extends the potential relief period for some debtors by an additional sixty (60) days—for a potential total of one hundred and twenty (120) days. Critically, this amendment only applies to certain small business debtors filing under subchapter V of Chapter 11 that continue to experience material financial hardship due to COVID-19. Subchapter V is currently limited to debtors whose debts do not exceed $7,500,000. This debt limit is set to revert back to approximately $2.7 million in March 2021, unless Congress extends the temporary debt limit increase. Of note, Senators Dick Durbin and Chuck Grassley introduced legislation on February 25, 2021 seeking to extend this and other bankruptcy related protections until March 2022.
Second, the CAA amends the bankruptcy code to provide a debtor with additional time to “assume” or “reject” its commercial leases. Prior to the CAA, a debtor only had 120 days to assume or reject a lease, with a possible 90-day extension. The CAA extends this initial deadline to 210 days. Therefore, 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.
Third, the CAA amends the bankruptcy code to provide that any “covered payment of rental arrearages” cannot be avoided as preferential transfers. “Covered payments” are defined as payments made pursuant to arrangements between the debtor and landlord on or after March 13, 2020 to defer or postpone payments owed under a lease. This amendment aims to incentivize landlords to offer flexible payment terms to financially distressed businesses without fear of future payments for deferred rent being clawed back if the tenant files for bankruptcy.
In sum, the CAA attempts to provide relief for commercial tenants experiencing COVID-19-related financial woes. Commercial tenants, however, will not enjoy this relief forever. Unless further extended, these amendments will be removed from the Bankruptcy Code on December 27, 2022.
Republished with permission. This article, "Guest Notebook: New Law Offers Rent Relief for Commercial Tenants," was originally published by the Birmingham Business Journal on March 30, 2021 and can be accessed here (login required).