Chapter 11 bankruptcy offers business owners the chance to reorganize their debts and continue operating. However, it can raise genuine questions about the future of commercial leases.
For entrepreneurs in Maryland, understanding how Chapter 11 bankruptcy impacts commercial leases is important for making informed decisions during the restructuring process.
What happens when you file for Chapter 11 bankruptcy?
When a business files for Chapter 11 bankruptcy, an automatic stay immediately goes into effect. This stay prevents creditors, including landlords, from taking any action to collect debts or evict the business from its commercial property. The automatic stay allows the business to continue its operations without the threat of losing its location. However, this protection is not permanent. The business must eventually address its commercial lease as part of the bankruptcy proceedings.
How does Chapter 11 affect my lease?
Under Chapter 11, businesses have the option to either assume or reject their commercial leases. If the business assumes the lease, it agrees to continue fulfilling the terms of the lease, including paying rent. The business may also negotiate new terms with the landlord to better align with the reorganization plan. This can provide the business with some flexibility to adjust lease terms in a way that supports its financial recovery.
If the business decides to reject the lease, it essentially breaks the contract. The landlord can then file a claim for damages resulting from the breach. The business will need to find a new location or determine how to proceed without the leased space. This decision can significantly impact the business’s operations, so it requires careful consideration.
Chapter 11 bankruptcy presents the opportunity to continue operating your business, but reorganizing your assets can make it difficult to afford your lease afterward. While filing for Chapter 11 does not necessarily affect your commercial lease, it is important to consider whether you should assume or reject the lease in the long run.
