Can Landlords Terminate Lease Agreements During Bankruptcy?

The treatment of lease agreements during bankruptcy or insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) can significantly affect both the landlord (lessor) and the tenant (lessee). If a company enters insolvency, landlords may wonder whether they can terminate lease agreements, how they can enforce their rights, and how any unpaid rent or arrears will be handled.

Can Landlords Terminate Lease Agreements During Bankruptcy?

Lease Agreements and Insolvency

When a company is undergoing insolvency proceedings (specifically the Corporate Insolvency Resolution Process (CIRP)), the company continues to operate under the management of the Resolution Professional (RP).

If the RP decides that the lease is essential for the company’s business, the lease may continue, and the company is required to fulfill its obligations under the lease agreement, including paying rent.

However, landlords do have certain rights during insolvency proceedings. The Insolvency and Bankruptcy Code (IBC) provides a framework under which landlords can raise concerns regarding unpaid rent or the continuation of lease agreements.

Landlord's Rights Under IBC

Landlords as Operational Creditors: During the CIRP, landlords are generally considered operational creditors. This means that they have the right to submit their claims for unpaid rent as part of the creditor's list.

Termination of Lease Agreements: While the Resolution Professional (RP) has the power to either continue or terminate lease agreements, landlords do not have the unilateral right to terminate the lease just because the tenant is undergoing insolvency. However, the RP may decide to terminate or renegotiate the lease if it is deemed no longer viable or beneficial for the company.

Filing Claims for Unpaid Rent: If the company fails to pay rent during the insolvency process, landlords can file claims for unpaid rent under the insolvency proceedings. These claims are generally treated as operational debts and are prioritized in the insolvency process.

Post-CIRP Rent: Any rent that accrues after the start of insolvency proceedings (post-CIRP) must be paid in full. This rent is treated as new operational debt and is given priority for payment.

Termination Rights in Liquidation

If the company moves from CIRP to liquidation, the liquidator takes over and will decide whether to continue or terminate the lease agreements. In this case, landlords may have a better chance of lease termination as the company may no longer be in operation.

If the lease is terminated in liquidation, landlords can file claims for unpaid rent or other liabilities as part of the liquidation process, but these claims will be treated as unsecured debts and will be paid only after higher-priority creditors are satisfied.

Impact of Lease Continuation

If the Resolution Professional decides to continue the lease, the landlord is expected to receive rent payments for the period during which the company continues to occupy the premises, but pre-CIRP rent arrears may not be fully recovered if the company's assets are insufficient to meet all its obligations.

If the lease continues, landlords are required to honor the lease terms and accept rent payments for post-CIRP periods as part of the operational debt.

Landlords’ Ability to Exercise Termination in Certain Circumstances

In cases where the RP decides to continue operations but fails to meet the lease obligations, landlords can take legal action or file a claim to ensure payment for unpaid dues.

Renegotiating Lease Terms: In some cases, landlords may choose to renegotiate the terms of the lease with the RP to reflect the changed circumstances due to the company’s financial difficulties.

Section 14 of IBC: This section imposes a moratorium on the commencement or continuation of any legal proceedings against the corporate debtor during the CIRP, which includes eviction proceedings by landlords. This means landlords cannot initiate eviction or terminate leases during the moratorium period, but they can file claims for unpaid rent.

Example

Suppose a retail company enters insolvency and is undergoing CIRP. It has several commercial leases, including a lease with a landlord for a store location. The Resolution Professional (RP) decides that the location is essential for the company’s operations, so the lease is continued, and the company is expected to continue paying rent for the period following the insolvency filing.

However, if the company fails to pay the rent or arrears that accrued before the insolvency process, the landlord can file a claim for the unpaid rent as part of the operational debt. If the company moves to liquidation, the liquidator may decide to terminate the lease agreements and landlords can file their claims as part of the liquidation process, though these claims will be treated as unsecured debts.

Legal Protections for Landlords

Filing Claims: Landlords can file claims for unpaid rent or other dues as part of the insolvency process, but these claims are typically treated as operational debts.

Eviction During Moratorium: Under Section 14 of the IBC, landlords cannot evict the company or terminate the lease during the moratorium period of the CIRP.

Termination in Liquidation: If the company enters liquidation, landlords may have the right to terminate the lease, and they can file claims for unpaid rent in the liquidation process.

Conclusion

Landlords do not have the unilateral right to terminate lease agreements during the insolvency process under the Insolvency and Bankruptcy Code (IBC). The Resolution Professional (RP) has the authority to decide whether to continue or terminate leases, depending on the business needs of the company. Landlords can file claims for unpaid rent as operational creditors, and post-insolvency rent must be paid in full. In the event of liquidation, leases are typically terminated, and landlords can claim unpaid rent, but they are treated as unsecured creditors with lower priority for payment.