Nordia Law

Bankruptcy of a tenant can be a challenging situation for a lessor of a business premises. Act on Commercial Leases (481/1995) sets the guidelines and framework within which a lessor must act in such situations.

When a tenant is declared bankrupt, the first thing the lessor needs to consider is the continuation of the lease agreement. According to Section 39 of Act on Commercial Leases (481/1995) the lease agreement does not automatically terminate due to bankruptcy of the tenant. Under certain circumstances, the tenant’s bankruptcy estate has the right to continue as tenant under the same conditions as before the bankruptcy.

The lessor has the right to rescind the lease agreement if the tenant’s bankruptcy estate does not, within a period of at least one month set by the lessor, declare itself responsible to take over the lease agreement, i.e. in practice, declare itself responsible to fulfil the obligations arising from the lease after the beginning of the bankruptcy. This provision means that the lessor is required to take active measures to inform the bankruptcy estate of the tenant’s commitment to the lease agreement. The lessor must set a deadline of at least one month for the tenant to give aforementioned commitment.

The lessor should ensure that they receive information about the bankruptcy estate’s decisions as promptly as possible. If the bankruptcy estate is not willing to adhere to the existing lease agreement, the lessor should actively seek a new tenant.

It is also worth noting that in a situation where the bankruptcy estate is not adhering to the existing lease agreement, it is only responsible for paying the rent for the period during which it is occupying the business premises. In practice, this means a daily amount of rent, also referred as the ‘’compensation for use’’. The ‘’use’’ of the commercial premises does not mean that the bankruptcy estate merely leaves its property in the commercial premises, but that other acts are also required to fulfil the prerequisites.

Claims based on lease agreement and liability of the bankruptcy estate

Due to bankruptcy of the tenant, arises issues regarding claims arising from the lease agreement. Rents that are due prior to the bankruptcy are claims in bankruptcy, which the lessor can declare to the estate administrator.

Rents due after the beginning of the bankruptcy are so-called administrative expenses, which the bankruptcy estate is required to pay on time if the estate continues the lease agreement. In the event that the estate does not adhere to the existing lease agreement, the compensation for use is an administrative expense. This means that compensation for use must be claimed directly from the bankruptcy estate. Primarily, the administrative expenses are paid out of the assets of the estate before the assets of the estate are divided among the creditors in bankruptcy in accordance with priority and proportion regulation regulated by law.

Expenses incurred for the lessor in removing the tenant’s property from premise and cleaning, emptying and for example rekeying the premise as well as possible compensation for premature termination of the lease agreement, are claims in bankruptcy, so called lodged claims, of which the lessor will eventually receive a disbursement, if creditors with non-precedence receive such a disbursement.

The lessor should be careful in recording and reporting rental claims. It is recommended that lessor contacts the estate administrator as soon as the bankruptcy becomes known and ensures that all claims based on the rents are reported to the estate.

Securities and guaranties

It is advisable for the lessor to review the securities and guarantees of the lease agreement in the event of tenant’s bankruptcy. Often, commercial leases include a security deposit, which can be cash security, a bank guarantee or a guarantee from a parent company. These securities are in an important role in securing the lessor’s claims.

If the tenant has given a cash security, the lessor may use it to cover unpaid rents. A bank guarantee, on the other hand, requires that the lessor makes a claim to the bank for the payment of the guaranteed amount. It is essential to act quickly and diligently in order to maximize the use of securities. Additionally, proper lodge of the claims is also essential for the lessor to avoid loss of rights against possible guarantor. Failure to lodge the claims will discharge potential guarantor from its liability to the extent that the lessor would have obtained its claim by lodging the claim from the assets of the estate.

New tenant and renegotiation of the lease agreement.

If the bankruptcy estate does not adhere to the existing lease agreement, the lessor should start looking for a new tenant. The process of finding a new tenant is also a good opportunity to reassess the terms of the lease agreement. Taking into account the current market conditions and reconsidering the aims of the lessor may also be worth considering.

Simultaneously, the lessor should also assess the amount of the rent and other conditions of the lease agreement, such as the length of the term and possible investments in the business premises. A good tenancy is balanced between the needs of the tenant and the lessor and provides sufficient security for both parties.

Condition of the premises and maintenance liabilities

Tenant’s bankruptcy may affect the condition of the premises and maintenance. If the bankruptcy estate does not adhere to the existing tenant, the lessor should inspect the condition of the business property and possible damages as soon as possible. It is important that the lessor accurately documents the condition of the premise so that the claims can be directed to the bankruptcy estate or they can be covered from the security deposit.

Additionally, the lessor must ensure that the maintenance and necessary repairs of the business premises continue without interruptions, even if the tenant is bankrupt. This often leads to extra costs that need to be taken into account in budgeting.

Communication

Tenant’s bankruptcy requires frequent communication between the parties involved. The lessor should actively communicate with the bankruptcy estate’s administrator, guarantors, potential guarantors and if necessary, legal advisors.

Legal assistance is often necessary to ensure that the lessor’s rights are protected. Consulting an attorney can help clarify the lessor’s obligations and rights in a bankruptcy proceeding and ensure that all actions are conducted in accordance with the law.

Conclusion

Tenant’s bankruptcy is a challenging situation that requires a lessor to react accurately and promptly. The main issues to consider are the continuity of the existing lease agreement, collecting rents and claiming compensation for use. In addition, collecting compensation for use, liquidation of securities, seeking for a new tenant, inspecting the condition of the premises and seeking for legal assistance is also important.

Planning in advance and good cooperation with bankruptcy estate and other parties can help lessor to minimize financial losses and ensure that the business premises remain in good condition after the tenant’s bankruptcy.

Since scrutiny of the bankruptcy estate typically takes a long time, and the lessor may have to wait up to several years for a possible disbursement on his/hers claims, the lessor should consider solutions even prior to the bankruptcy begins if the tenant’s economical situation looks weak and the rents are left unpaid. Appropriate securities and effective collection before bankruptcy proceedings are a lessor’s greatest safeguards in order to minimize risks regarding tenant’s bankruptcy.