Daily Development for Thursday, August 17, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

BANKRUPTCY; LEASES; TERMINATION: Bankruptcy filing will not toll the running of a time period under a lease where no actual proceeding or similar act against the debtor was involved. As a result, under New York law, even though there was a time period for notice of termination to run at the time of the tenant's filing, the leasehold interest terminated and there was no property interest for the tenant to assume or reject.

Policy Realty Corp. v. Treber Realty LLC, 2000 WL 534265 (2ndCir. (N.Y.))

Treber was landlord under a lease to a CoOp and Policy was a sublesee of the first floor of the property, which it in turn subleased to others. The lease provided for certain arbitrated escalations, and an arbitration process resulted in an increase in the rent in the amount of $700,000. When Policy failed to pay the adjusted rent, Treber sent notices terminating the lease. Policy brought a series of state court actions attempting to avoid the termination and to toll the termination until those actions were resolved. A state court ultimately held that the tolling of the termination of the lease would not continue unless Policy Realty posted a bond in the amount of $500,000.00 by September 9, 1998.

Policy did not post the bond but instead filed for bankruptcy protection at approximately 4:00 p.m. on September 9, 1998.

The Court's analysis agreed with the District Court in looking to state law to determine the property rights and the assets included in a bankrupt's estate. In this case, the ground lease was correctly terminated under New York Law pursuant to a conditional limitation. No further action was required by the ground lessor to terminate the lease.

The Court held that the Bankruptcy Code's automatic stay does not toll the time running under a contract but was only intended to act as a stay on actual proceedings and similar acts against the debtor. When Policy failed to post the bond as required, the ground lease and also Policy's sublease were automatically terminated under New York law. Because Policy no longer had a property interest in its sublease, the Court declined to analyze its claims under the Bankruptcy Code. Lastly, the Court noted that the District Court correctly held that Policy possessed no equitable possessory interest in the subleased premises because it subleased the entire premises to a number of different businesses and did not hold possession of any part of the premises itself.

Comment 1: DIRT reported on the lower court decision here in the DD for 3/16/00, which can be found on the DIRT website: http://cctr.umkc.edu/dept/dirt

Comment 2: Not every landlord will be so successful, particularly if the tenant does have some possession. Nevertheless, the best advice to give to any landlord faced with a tenant in precarious financial circumstances is to terminate promptly when the occasion presents itself. This is going to leave the landlord in the best position when bankruptcy arrives, which it almost certainly will. If the lease is not terminated at time of bankruptcy, the lease is an asset of the estate that the estate will be able to retain and assign (regardless of antiassignment language) to tenants that may not be those that the landlord would choose. Further, the process of working through the bankruptcy will leave the future of the premises uncertain for a time, and may lead to empty space and poor maintenance, even if the bankruptcy trustee is paying administrative rent.

Comment 3: This is not a situation in which one sends a warning notice demanding that arrearages be paid or eviction will ensue. Such a letter is an engraved invitation to the tenant to go bankrupt. It should not be sent unless it is required by the lease or by prior acceptance of late rent payments.

The downside, of course, is that termination of the lease in many jurisdictions may cut off some optional remedies against the tenant for future rents. But if the tenant is going broke anyway, these remedies are unlikely to have much value.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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