4 things to know about Chapter 7 bankruptcy and a commercial lease

On Behalf of | Oct 21, 2023 | Bankruptcy |

Facing financial distress is a challenging situation for any small business.

In some cases, Chapter 7 Bankruptcy becomes a viable option for business owners seeking relief from overwhelming debts. When considering this route, one of the pressing concerns is the commercial property lease.

1. Lease types matter

The type of lease you have plays a pivotal role in Chapter 7 bankruptcy proceedings. A full-service lease, for instance, includes utilities, maintenance and property management in the rent. In contrast, a triple-net lease requires the tenant to cover these costs separately. Understanding your lease type is important in determining the potential consequences.

2. Asset valuation

In Chapter 7 Bankruptcy, all assets get assessed for their value. This includes the business’s interests in leased properties. The value attributed to the lease can affect the outcome of the bankruptcy process. Small businesses must accurately appraise the leased property to minimize potential losses.

3. Rejection or assumption

Small businesses facing Chapter 7 Bankruptcy have two options regarding their commercial leases: rejection or assumption. Rejection involves surrendering the lease to the landlord, while assumption entails continuing with the lease. The decision often hinges on the property’s value, the lease’s terms and the company’s future prospects.

4. Lease negotiation

A proactive approach to lease negotiation can be advantageous for small businesses. In some instances, landlords may be open to renegotiating the lease terms, such as lower monthly rent or shorter lease periods. These negotiations can help the business manage its financial obligations more effectively post-bankruptcy.

Although Chapter 7 bankruptcies were down in 2022, with only 225,455 compared to 288,327 in 2021, filing still serves as the best option in many situations. When considering bankruptcy, small businesses must assess their unique circumstances, including their commercial property lease, to make informed decisions.