As discussed in a previous post, the Consolidated Appropriations Act of 2021 (the “Act”), which was enacted on December 27, 2020 in response to the economic distress caused by the COVID-19 pandemic, amended numerous provisions of the Bankruptcy Code.  This post discusses amendments specifically affecting landlords. 

First, the Act assists debtors by amending Section 365(d)(3) of the Bankruptcy Code to allow, at the bankruptcy court’s discretion, small business debtors experiencing pandemic-related financial hardship an extra 60 days, in addition to the initial 60-day grace period, to make payments under unexpired leases of non-residential real property following the bankruptcy filing date. Allowing small business debtors to defer rent for four months will improve their short-term cash liquidity at the start of their bankruptcy case, although such deferred payments would be treated as administrative expenses entitled to the highest priority under the Bankruptcy Code’s distribution scheme.  This extended grace period for small business debtors is consistent with a trend which has emerged in large retailer bankruptcy cases during the pandemic, in which many debtor tenants – including Pier 1 and Chino’s (J. Crew and Madewell) – have obtained extended rent deferrals due to the uncertainty and economic distress caused by the COVID-19 pandemic.

Second, the Act modifies Section 365(d)(4) of the Bankruptcy Code to extend for an additional 90 days the deadline for trustees or debtors in possession to assume or reject non-residential real property leases, for a total of 210 days from the initiation of the bankruptcy case.   Because the Bankruptcy Code already allows this initial period to be extended by an additional 90 days “for cause”, a debtor can have up to 300 days to decide whether to assume leases.  Recently, in In re Bouchard Transportation Co., Inc., et al., a case filed approximately three months before the Act was passed, the United States Bankruptcy Court for the Southern District of Texas seemingly concluded that the amendment to Section 365(d)(4) was retroactive, and entered an order extending the debtors’ period to assume or reject non-residential real property leases until 210 days after their cases were filed.  Case No. 20-34682, at Docket Nos. 374, 378.  No landlord challenged the Bouchard debtors’ conclusion that the amendment to Section 365(d)(4) applies to cases filed before the Act, and it remains to be seen whether other courts will follow Bouchard.

These lease-related modifications to the Bankruptcy Code are set to expire on December 27, 2022 but will apply to any subchapter V case filed before this date. 

Until these provisions sunset, a landlord considering terminating the lease of a tenant who has fallen behind on rent payments should consider that the tenant’s bankruptcy could result in a multi-month delay in rent payments and a significant period of uncertainty regarding assumption of the lease.