Navigating the Crossroads of Bankruptcy and Real Estate: Challenges, Strategies, and Opportunities

By Kristina M. Stanger, Henry J. Jaffe, Amy M. Oden, Jeffrey Azuse, and Maria Z. Cortes

Henry J. Jaffe is a partner at Pashman Stein Walder Hayden P.C. in Wilmington, Delaware.

Amy M. Oden is an associate at Pashman Stein Walder Hayden P.C. in New York, New York.

Jeffrey Azuse is an executive vice president at Hilco Real Estate. He leads the real estate sales group within Hilco, with a focus on bankruptcy sales.

Maria Z. Cortes is an associate at Holland & Knight in Philadelphia, Pennsylvania. She is the vice chair of the Section’s Retail Leasing Group and an associate articles editor of this magazine.

In the ever-evolving landscape of commercial real estate, bankruptcy often looms as a potential disruptor. Although it is a critical legal and financial tool for companies seeking relief, bankruptcy can significantly affect real estate stakeholders—landlords, tenants, lenders, and developers. With a comprehensive understanding of the Bankruptcy Code, however, stakeholders can navigate these challenges effectively and even uncover opportunities amid uncertainty.

This article explores the intersections of real estate and bankruptcy law, illustrating key principles through recent trends and case studies and offering practical strategies for real estate constituents to mitigate risks and leverage opportunities.

Bankruptcy and Real Estate: An Overview

Bankruptcy is governed by Title 11 of the U.S. Code, enacted under Congress’s authority to legislate uniform bankruptcy laws. U.S. Const. art. I, § 8, cl. 4. Under this authority, Congress enacted the “Bankruptcy Code.” The Bankruptcy Code balances debtor relief and creditor rights, enabling debtors to reorganize or liquidate while protecting creditors’ interests. Specific chapters, such as Chapter 11 (reorganization) and Chapter 7 (liquidation), often directly intersect with real estate issues.

The COVID-19 pandemic catalyzed a seismic shift in work culture, leading to widespread adoption of remote work and a decline in demand for office spaces. As property owners grapple with refinancing challenges, maturing loans, and higher interest rates, bankruptcies among real estate constituents have surged. In early 2024, bankruptcy filings for cases involving real estate valued above $5 million reached record levels, reflecting this trend.

Kristina M. Stanger is a shareholder attorney at Nyemaster Goode, PC in Des Moines, Iowa. She is the firm chair for the bankruptcy and creditor’s rights group.

Types of Bankruptcy Filings—The Chapters

There are seven forms of bankruptcy cases under the Bankruptcy Code, which are referred to by the name of the chapter that describes them.

Chapter 7—Liquidation

A Chapter 7 bankruptcy proceeding is an orderly, courtsupervised procedure by which a Chapter 7 trustee steps in to control and liquidate the debtor’s assets, reducing them to cash and then making cash payment distributions to creditors. The debtor may retain exempt property. These cases often can be resolved in fewer than 90 days from filing. If the debtor is an individual, the debtor receives a discharge and release from any future personal liability for most debts. If a debtor’s income exceeds certain thresholds, however, the debtor may not be eligible for Chapter 7 relief and might need to seek relief under Chapter 11 or Chapter 13.

Chapter 9—Municipality

A Chapter 9 bankruptcy proceeding provides for the reorganization of a “municipality.” This chapter includes relief for cities and towns, counties, taxing districts, municipal utilities, and school districts.

Chapter 11—Reorganization

A Chapter 11 bankruptcy proceeding is used when a business seeks to continue operating and repay creditors through a court-approved plan of reorganization or to sell the business as a going concern (meaning selling the business while it is still operational). The debtor has the exclusive right to file a plan of reorganization during the first 120 days. After this period, other parties may file their own plans for the debtor’s business. The plan must be voted upon and approved by creditors and subsequently confirmed by the court. Through this process, the debtor can reduce debts, discharge others, terminate burdensome contracts and leases, recover assets, pursue claims, and adjust operations to return to profitability. Although Chapter 11 can be costly and time-consuming, the ultimate goal is to enable the business or a portion of it to emerge from bankruptcy in a stronger financial position.

Chapter 11, Subchapter V—The Small Business Chapter 11

For a debtor that meets the definition of a “small business debtor” under 11 U.S.C. § 101(51D), the business may qualify for a Subchapter V bankruptcy. This “mini–Chapter 11” offers a quicker and more cost-effective process than a traditional Chapter 11. Notably, under Subchapter V, equity owners may retain ownership of the business following the reorganization.

Chapter 12—Family Farmer or Fisherman

A Chapter 12 bankruptcy proceeding provides debt relief to family farmers and fishermen currently engaged in operations, provided their total debts do not exceed $11,097,350 (for family farmers) or $2,268,550 (for family fishermen). The Chapter 12 process is similar to Chapter 13, under which the debtor proposes a plan to repay debts over three to five years. A Chapter 12 trustee disburses payments to creditors under the confirmed plan, while the debtor is allowed to continue operating the business during this period.

Chapter 13—Income Earner’s Bankruptcy

A Chapter 13 bankruptcy proceeding is designed for individual debtors with a regular source of income whose debts exceed the limits for Chapter 7. In Chapter 13, the debtor proposes a plan to repay creditors over three to five years, allowing the debtor to retain valuable assets. Unlike Chapter

7, Chapter 13 is not a liquidation and the debtor keeps possession and control of assets while making payments through a Chapter 13 trustee under the plan. Upon completing all plan payments, the debtor receives a discharge of the remaining debts. During the plan period, the debtor is protected from creditor actions.

Chapter 15—Cross-Border

A Chapter 15 bankruptcy filing addresses cross-border insolvency cases. It is used when a debtor has insolvency issues within the United States and in a foreign country.

Key Bankruptcy Concepts Affecting Real Estate

Automatic Stay (11 U.S.C. § 362) At a high level, the automatic stay is a cornerstone of bankruptcy law, halting all creditor actions against a debtor upon filing. For real estate, this means landlords cannot evict tenants and lenders cannot foreclose on properties without court approval. Creditors can seek relief from the stay under certain conditions, however, such as a lack of adequate protection or if the debtor lacks equity in the property.

Specifically, Section 362(a) of the Bankruptcy Code provides for an automatic stay of all claims and actions against a debtor once a bankruptcy case is filed. 11 U.S.C. § 362. Automatic means automatic—the stay starts by operation of law upon the filing of a bankruptcy petition without any further notice or due process. See id. § 362(a). “The automatic stay is one of the fundamental protections for a debtor and permits the debtor to focus on its reorganization.” In re Roman Cath. Diocese of Rockville Ctr., New York, 651 B.R. 622, 637 (Bankr. S.D.N.Y. 2023).

The automatic stay operates to stay, among other things, (i) the commencement or continuation of any action or proceeding or collection attempts (see 11 U.S.C. § 362(a)(1), (6)), (ii) any action to enforce a judgment (see id. § 362(a) (2)), (iii) any action to obtain possession or control over the debtor’s property (see id. § 362(a)(3)), and (iv) any action to set off a debt, which could include applying a security deposit to a tenant’s leasehold obligation (see id. § 362(a)(7)).

There are, however, certain exceptions to the automatic stay, including efforts by a landlord to recover possession of an expired lease of nonresidential real property. See id. § 362(b) (10). In addition, even where the stay applies, creditors and other parties can seek permission from the bankruptcy court to have the stay lifted so that the creditor can take certain— otherwise stayed—actions against the debtor, most often in situations where the creditor is a mortgagee who can either show cause, including a lack of adequate protection of the creditor’s interest in the property (see id. § 362(c) (1)), or where the debtor has no equity interest in the property and it is not necessary for an effective reorganization (see id. § 362(c)(2)(A)–(B)).

Creditors are well advised to take the automatic stay very seriously. Generally speaking, the majority of courts conclude that a violation of the automatic stay by a creditor is simply void and the action taken will be treated as if it never happened (and even the minority of courts find that such actions are, at the very least, voidable). The real danger is that a “willful” stay violation can land a creditor in trouble and a “willful” violation means only that a party knows or has reason to know of the bankruptcy case, not that it knows that its action violated the stay. See id. § 362(k)(1). A debtor can seek and obtain costs, attorney fees, damages, and even punitive damages for a knowing stay violation. See id. Thus, when in doubt, creditors should not take an action that may potentially be subject to the stay, and, if they think that the action may be stayed, seek advice of bankruptcy counsel before you proceed.

Lease and Executory Contract Provisions (11 U.S.C. § 365)

At a high level, under Section 365 of the Bankruptcy Code, debtors can assume (assumption) or reject (rejection) executory contracts (contracts where go-forward performance is owed both by the debtor and by the non-debtor party), which can include real property leases. Assumption allows the debtor to cure defaults and continue the lease, while rejection treats the lease as if it were breached, allowing landlords to claim damages capped by Section 502(b)(6). For landlords, this provision provides critical protections, such as the requirement for debtors to pay post-petition obligations (debts incurred after filing for bankruptcy) promptly under Section 365(d)(3).

Perhaps the most important highlevel concept that arises with respect to leases and executory contracts is that Section 365 of the Bankruptcy Code permits a debtor-in-possession (typically in a Chapter 11 or 13 case) or a trustee (typically in Chapter 7 or in some Chapter 11 cases) to either assume or reject leases. If the lease is assumed, it is, in essence, affirmed and blessed, and the debtor or trustee must cure defaults and perform moving forward. 11 U.S.C. § 365(b)(1)(A)–(C). If the lease is rejected, upon the date of the rejection, the debtor or trustee is generally excused from performing under the lease going forward, the rejection is treated as a pre-bankruptcy breach of contract, and the creditor can assert claims arising from that breach. Id. § 365(g).

In terms of the debtor’s decision to either assume or reject a lease, the decision itself is difficult to contest as it comes down to the debtor’s (or trustee’s) business judgment as to whether the action proposed (assumption or rejection) is in the best interests of the debtor’s bankruptcy estate. From a practical perspective, it is almost impossible to successfully oppose a rejection (where the debtor or trustee has decided that the lease is a burden to the bankruptcy estate) and, because of this, counterparties rarely even attempt to contest a rejection.

Another high-level takeaway, and as discussed below, is that Section 365 of the Bankruptcy Code has a number of key protections for landlords of nonresidential real property leases as well as tenants of all residential and nonresidential real property leases.

Use and Sales of Property Under Bankruptcy Code Section 363

As a general rule, the Bankruptcy Code permits a debtor-in-possession to continue operating its business and performing ordinary-course-of-business transactions during a Chapter 11 case, including paying ordinary-course post-bankruptcy obligations, without first obtaining an order of the bankruptcy court. See id. § 363(c). By contrast, in a Chapter 7 case, the trustee typically does not operate the debtor’s business. Chapter 7 is the Bankruptcy Code’s liquidation chapter, and the trustee must obtain court authority to operate the business, which rarely occurs. See id. § 721.

Section 363(b) of the Bankruptcy Code also permits a debtor to sell some or all of its property in a bankruptcy sale, considered “out of the ordinary course of business,” subject to bankruptcy court approval. Such bankruptcy sales may include the sale of property subject to a mortgage and also may include the assumption and assignment of real property leases. Additionally, because these “out of the ordinary course of business” sales require decisions to be made about which leases will be assumed and assigned to the purchaser, it is often during this time that many leases undesirable to the purchaser are rejected by the debtor. This rejection helps reduce post-bankruptcy operating costs, such as post-bankruptcy rent and other leasehold obligations that the debtor must pay to its landlord.

The Chapter 11 Bankruptcy Plan

Cases in Chapter 11 culminate in the confirmation of a Chapter 11 bankruptcy plan, which may be either a plan of reorganization (allowing the debtor to continue operating after confirmation) or a plan of liquidation, provided the standards of Section 1129 of the Bankruptcy Code are met. Among these standards is the requirement that all post-bankruptcy “administrative claims” (typically valid operating claims, including leasehold obligations arising post-bankruptcy) must be satisfied in full when the plan becomes effective. See id. § 1129(a)(9)(A). But in small business bankruptcies under Subchapter V of Chapter 11, these administrative claims may be paid over time. See id. § 1191(e).

To the extent that a real property lease (or any other lease or executory contract, for that matter) has not yet been assumed or rejected, the confirmation of the plan becomes the outside deadline by which a debtor must decide whether to assume or reject it. See id. § 365(d)(2) (for residential real property), (4) (for nonresidential real property). Note, however, that, as discussed below, there are limited time periods in Chapter 11 cases for the debtor to assume or reject nonresidential real property leases where it is the tenant. Nevertheless, assumption or rejection must still be determined no later than plan confirmation.

Deadlines and Details

One word of caution for clients and attorneys who do not regularly practice bankruptcy law: be extremely careful about your rights in bankruptcy and strongly consider seeking the assistance of bankruptcy counsel.

Bankruptcy cases are replete with deadlines and traps for the unwary. To begin, there is the deadline for filing proofs of claim, and failure to file a claim could bar any recovery in the bankruptcy case. If a lease is rejected, there will be another deadline for filing rejection damage claims. Additionally, there may be deadlines for filing unpaid post-bankruptcy “administrative” claims.

Landlords and tenants also must keep careful track of notices to assume or reject leases. These motions and notices often contain very short deadlines for parties to assert claims (even if they have already filed a proof of claim) under their leases, or they risk losing those claims. Finally, all bankruptcy plans and sale motions must be carefully reviewed to determine their effect on lease or mortgagee rights. It is not uncommon for these motions and plans to be difficult—even for bankruptcy attorneys—to decipher, with key details and deadlines often buried in obscure sections of the documents.

Bankruptcy Issues for Landlords

Landlord-Specific Issues Under Section 365 of the Bankruptcy Code

Although it is true that a debtor or trustee may assume or reject a landlord’s lease in a bankruptcy case, there are, nonetheless, several key protections for landlords, especially landlords under nonresidential real property leases under Section 365 of the Bankruptcy Code.

Duty of Debtor to Pay Post-Bankruptcy Obligations

Although it is generally true that a debtor-in-possession has the ability to pay post-bankruptcy obligations in the ordinary course of business under Section 363(c) of the Bankruptcy Code, in most cases, a debtor (or trustee) is not required to pay those obligations as they come due. The consequence of a debtor’s or trustee’s failure to pay these obligations is that a creditor may have to wait until the end of the case to be paid on these claims (either pursuant to a Chapter 11 plan or a trustee’s distribution of estate proceeds), as Section 1129(a)(9)(A) requires these claims to be paid on the effective date of a Chapter 11 plan. See id. § 1129(a)(9) (A). If a case is “administratively insolvent” (i.e., there are insufficient assets to pay administrative claims in full, which generally means a plan cannot be confirmed), the bankruptcy case may be converted to Chapter 7, and those claims might not be paid in full or at all. Fortunately for landlords under nonresidential real property leases, Section 365(d)(3) requires the debtor or trustee to promptly pay all leasehold obligations arising post-bankruptcy, such as monthly rent and other charges. This may be true even if some of those claims relate to the pre-bankruptcy period, so long as the obligation to pay only arises under the lease post-bankruptcy. Regarding what obligations must be performed, some courts use a “billing date” approach, which means that the obligation must be performed so long as it first comes due and can be billed during the post-bankruptcy period, even if the obligation (such as taxes) accrued in whole or in part prebankruptcy. Other courts, however, require the obligation to be performed only if it accrued during the post-bankruptcy period (the so-called accrual approach).

A more complicated situation arises for landlords in nonresidential real property cases where the bankruptcy case is filed after an obligation to pay monthly rent arises and before the following month’s rent is due. For example, if rent was due on January

1 and the bankruptcy case is filed on January 10, is the landlord entitled to partial rent, or, in bankruptcy parlance, “stub rent,” for the rest of the month of January? If so, does it need to be paid immediately upon the bankruptcy filing? Even under the billing date rule, where all rent for the month was due pre-petition, while the landlord is entitled to an administrative priority claim in the bankruptcy case (which would have to be paid upon confirmation of a bankruptcy plan), it is not entitled to immediate payment of these monies. Likewise, courts appear to find that, even under the accrual approach, to be entitled to immediate payment under Section 365(d)(3), the obligation to pay must both arise under the agreement during the post-petition period and accrue during the post-petition period. Thus, if the contractual duty to pay arose pre-petition, there is generally no immediate duty to pay post-petition stub rent, although such claims will be entitled to administrative claim status.

Two additional items should be noted regarding Section 365(d)(3). First, the court does have some power, for cause shown, to extend the deadline for performance of any obligation that arises within the first 60 days of a case filing, but, in most cases, only to the 60th day after filing. See id. § 365(d)(3).

Second, Section 365(d)(3)’s protections apply to landlords under nonresidential real property leases. If the lease is a residential lease and the case is under Chapter 13 or 11, the tenant is permitted to pay the rent but may not be required to pay until plan confirmation.

Motion to Compel Assumption or Rejection

If the tenant does not pay rent or meet other leasehold obligations when due, the landlord is not left entirely without options. The landlord is permitted to file a motion to compel the debtor to assume or reject the agreement before the occurrence of any statutory deadline to assume or reject. See id. § 365(d)(2). Factors a court may consider in determining such a motion include (a) the damage that the non-debtor will suffer beyond compensation available under the Bankruptcy

Code, (b) the importance of the contract to the debtor’s business and reorganization, (c) whether the debtor has had sufficient time to appraise its financial situation and the potential value of its assets in formulating a plan, and (d) whether the debtor’s exclusive period for filing a plan has terminated. How a court will react to such a motion may depend on whether the lease is for nonresidential real property. If it is, courts take the requirement of immediate payment seriously and, if that obligation is not being met, may (or may not) require a rapid decision on assumption or rejection. If the lease is a residential lease, courts generally will give the debtor as much of a chance as possible to cure its defaults.

When Must a Debtor Decide to Assume or Reject a Lease?

So, when must a debtor (or a trustee if the case is in Chapter 7) decide to assume or reject a lease? In a Chapter 7 case, because it is presumed that the trustee will not be operating any business, the trustee is generally required to make a decision to assume or reject the lease within 60 days after the bankruptcy case was filed, unless the court, for cause, extends this time period. Id. § 365(d)(1). If the lease is not assumed within this time period, it is deemed to be rejected. Id

In a Chapter 11 or 13 case, if the lease is a residential lease, unless otherwise ordered by the court, the debtor has through the date of the confirmation of the plan to decide whether to assume or reject the lease. Id. § 365(d) (2). More stringent rules apply in Chapter 11 where the debtor is the tenant under a nonresidential real property lease. In that instance, the debtor or tenant has until the earlier of plan confirmation or 120 days from the filing of the bankruptcy case to assume the lease, unless, before expiration of that period, the court grants a further extension of 90 days for cause shown (resulting in a time period of as long as 210 days). See id. § 365(d)(4)(A)–(B). Moreover, the court may further extend the deadline past the 210-day period, but only with consent of the landlord.

Id. § 365(d)(4)(B)(ii). If, however, the lease is not assumed during such time period, it will be deemed rejected. Id. § 365(d)(4)(A).

Debtor’s Obligations in Connection with Assumption

If a debtor wants to assume a lease, it must promptly cure (i.e., pay) all monetary defaults arising under the lease before the assumption and also provide adequate assurance that it will continue to perform under the lease going forward. See id. § 365(b)(1)(A)–(C). The assumption process allows the landlord to be paid in full, even on the pre-bankruptcy unsecured claims for which it might otherwise receive little or no payment from the bankruptcy estate. Sometimes, if the debtor does not like the terms of the lease or believes that it is an over-market lease, it can seek to enter into a lease amendment with the landlord as a condition of assumption. Also, landlords should be aware that, although the debtor may have to cure most defaults arising under the lease, it will generally not have to cure defaults relating to the debtor’s insolvency or the filing of a bankruptcy case, as these provisions are generally unenforceable in this context. See id. § 365(b)(2).

The landlord and its counsel must keep a close eye on the bankruptcy docket and bankruptcy notices that they receive. Often, in a request or motion to assume a landlord’s lease, the identification of the lease itself may be buried in a long document or schedule. The time periods to respond, especially if the cure amount proposed is incorrect (which it frequently is), can be shockingly short. Sometimes, it is even the case that by the time the notice is received, the lease counterparty may have only a day or two to respond, so it is important to have counsel in place and ready to proceed.

Assumption and Assignment of Leases

Not only may a debtor assume a lease under the Bankruptcy Code, but it also may be authorized to assign the lease to a third party. The debtor will likely have this right even if the lease contains an anti-assignment clause, as such clauses are typically unenforceable in connection with assignments. See id § 365(f)(1)–(2). In fact, the assumption and assignment of leases are routine and essential aspects of many large Chapter 11 cases, particularly when the debtor is selling its business as a going concern to one or more buyers. In such cases, buyers often “cherry-pick” the best (below-market) leases and locations, and the debtor frequently rejects leases that are not assumed and assigned.

To assume and assign a lease, the debtor must cure all defaults (often, the debtor and buyer agree that the buyer will pay these amounts), and the buyer (rather than the debtor) must provide adequate assurance of future performance. Id. § 365(f)(2)(B). Additionally, the new tenant must provide a security deposit “substantially the same as would have been required by the landlord upon the initial leasing to a similar tenant.” Id. § 365(l).

In this context, as well as in cases of straight lease assumptions by a debtor, it is important to note that adequate assurance of future performance does not require an iron-clad guarantee of performance. Instead, the debtor’s performance must be likely (i.e., more probable than not), based on reason, and not speculative, arbitrary, or capricious, yet adhering to commercial standards.

Adequate Assurance Protections— Shopping Center Lease

The Bankruptcy Code provides specific “adequate assurance of future performance” protections to shopping center landlords to safeguard their unique rights and interests. To provide adequate assurance to a shopping center landlord, the debtor must demonstrate that (A) the source of rent and other payments due under the lease is sufficient, ensuring the assignee has a financial condition and operating performance similar to those at the time the lease was entered into; (B) the percentage rent will not decrease substantially; (C) the lease or its assignment will comply with all radius, use, location, and exclusivity provisions in the lease and will not breach other lease or financing restrictions with third parties; and (D) the assumption or assignment will not disrupt the tenant mix or balance in the shopping center. See id § 365(b)(3)(A)–(D).

Consequences of a Rejection

What happens if, instead of assuming your lease, the debtor rejects that agreement? Typically, the rejection of a lease, although it does not formally terminate the lease, will result in the debtor having to vacate the premises.

To the extent that any leasehold obligation relates to the post-bankruptcy period and remains unpaid, the landlord may assert a post-petition, first-priority administrative claim.

Additionally, the landlord will have a claim for breach of contract damages resulting from the rejection of the lease. The rejection of a lease is considered a breach of contract arising immediately before the filing of the bankruptcy case, giving rise to a pre-bankruptcy claim. See id. § 502(g)(1). A creditor must file a proof of claim for lease rejection damages, with the deadline set by the Bankruptcy Court. See Fed. R. Bankr. P. 3002(c)(4). These rejection damages are considered pre-bankruptcy claims and are typically unsecured unless they are secured by a deposit provided by the debtor under the lease. In such cases, they are considered secured claims under Section 506(a) (1) of the Bankruptcy Code. See 11 U.S.C. § 506(a)(1).

Furthermore, landlord damage claims are capped under the Bankruptcy Code. The landlord’s claim is limited to the amount owing as of the time of the bankruptcy petition filing (or, if earlier, the date the landlord repossessed or the tenant surrendered the property), plus unaccelerated rent “for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease.” See id § 502(b)(6).

The growing consensus, known as the “time approach,” interprets this provision to mean that damages are capped at an amount equal to the next one year of rent due under the lease or the rent due over the first 15% of the remaining term, but not exceeding three years of rent. For example, if the remaining lease term were 10 years, the prospective damages would be capped at 15% of the term, or the rent due for the first 1.5 years of the remaining lease. By contrast, the alternative “rent approach” applies the 15% cap not to the length of the lease but to 15% of the value of the remaining rent reserved under the lease. This approach could result in different outcomes, particularly if the lease provides for escalating rent payments. It is important to note that the Section 502(b)(6) limitation is a cap on damages, not a measure of damages. A creditor must first calculate its damages under non-bankruptcy law (taking into account the duty to mitigate) and then apply the Section 502(b)(6) cap to determine the extent of its potential claim.

Bankruptcy Issues for Tenants (Debtor Is Landlord)

In most bankruptcy cases involving leases, the debtor is typically the tenant; however, this is not always the case. In some instances, the debtor is the landlord. In such situations, the same overarching concepts regarding the debtor’s duty to assume or assign its leases under Section 365 apply, but the application of those rules differs. For example, the time period in Section 365(d)(4) for the debtor to assume or reject a nonresidential real property lease applies only when the debtor is the tenant, not the landlord. See id. § 365(d)(4). Similarly, the claims cap under section 502(b)(6) applies only when the creditor is a landlord.

By contrast, the 60-day period for a trustee to assume or reject a lease applies equally regardless of whether the debtor is the tenant or the landlord. Additionally, as discussed below, there is one notable provision of the Bankruptcy Code—Section 365(h)—that applies exclusively when the debtor is the landlord.

Protection for Tenants of Rejected Real Property Leases

What happens if the debtor is the landlord and rejects a real property lease where the non-debtor party is the tenant? Must the tenant vacate the premises upon rejection and be forced to relocate?

The answer to this question is generally no, because Section 502(h) of the Bankruptcy Code provides important possessory protections to the tenant of a real property lease. Upon rejection, the lease is treated as having been breached, allowing termination under non-bankruptcy law. The tenant may then treat the lease as terminated (and presumably vacate the premises while filing a claim for breach of contract). See id. § 365(h)(1) (A)(i). If the lease term has already commenced, the tenant may retain its rights under the lease—including the rights to possession, quiet enjoyment, and hypothecation, among others—for the balance of the lease term. This includes the right to renew or extend the lease term under the agreement and applicable law, provided the tenant satisfies its payment obligations. See id. § 365(h)(1)(A)(ii). In essence, the tenant may choose whether to remain in possession under the rejected lease, assuming the lease term has commenced.

But, in the event of such a rejection, does the debtor (landlord) or trustee have any performance obligations moving forward? The answer is generally no—but this does not mean the tenant is deprived of all its rights and remedies (though these rights are also limited). Upon rejection, if the tenant elects to retain its rights under the lease, the debtor’s or trustee’s performance obligations cease. The tenant may offset damages arising from the landlord’s nonperformance against the rent reserved under the lease. Beyond this, the tenant has no right against the bankruptcy estate or the debtor for damages occurring after the rejection date. See id. § 365(h)(1)(B). Additionally, the tenant’s rights under Section 365(h) may be asserted by any successor, assignee, or mortgagee permitted under the lease. See id. § 365(h)(1) (D). As a result, the tenant effectively waives any right to specific performance or to assert a claim based on the debtor’s or trustee’s post-rejection nonperformance.

Consequently, the tenant should carefully consider whether the rent it will pay is sufficient to offset the debtor’s nonperformance obligations or whether other landlord duties (e.g., HVAC services or common area maintenance) cannot be remedied or are excessively costly. If such costs exceed the value of the rental payments or render the property effectively uninhabitable, the election to retain possession may be rendered worthless. Furthermore, if the tenant elects to retain possession and the lease pertains to a shopping center, the rejection does not affect the enforceability of any applicable non-bankruptcy law or lease provision “pertaining to radius, location, use, exclusivity, or tenant mix or balance.” See id. § 365(h)(1)(C). This constitutes an important, though limited, exception to the general rule that lease terms are not enforceable upon rejection.

Section 365(d)(3) Obligations of Debtor or Trustee

Interestingly, Section 365(d)(3), which imposes timely performance obligations on the debtor or trustee pending the assumption or rejection of a lease, does not, by its terms, apply solely where the debtor is the tenant under a nonresidential real property lease. Rather, although this provision is typically viewed as providing critical protection to tenants, its plain language suggests that it should also apply where the debtor is the landlord. At least one court, however, has held that section 365(d)(3) applies only to debtor-tenants and not to debtor-landlords.

Bankruptcy Issues for Mortgagees (Debtor Is Mortgagor)

The automatic stay prevents mortgagees from foreclosing or stays foreclosure proceedings in the first instance, without the need for a court order. The stay “protects bankruptcy estates by restraining any formal or informal action or legal proceeding that might dissipate estate assets or interfere with the trustee’s orderly administration of the estate.” Picard v. Fairfield Greenwich Ltd., 762 F.3d 199, 207 (2d Cir. 2014). The stay applies even if the debtor has only a mere possessory interest in the property.

A mortgagee must seek relief from the automatic stay to proceed with a foreclosure. If the mortgagee is aware that the mortgagor has filed for bankruptcy but still proceeds with the foreclosure action, the mortgagee can be found to have “willfully” violated the automatic stay, which can result in sanctions.

General Powers and Rights of Mortgagees

Obtaining Relief from the Automatic Stay Section 362(d)(1) of the Bankruptcy Code provides that the court shall grant relief (e.g., by terminating, annulling, modifying, or conditioning the stay) for cause under section 362(d)(1), including a lack of adequate protection of an interest in the property. The court has broad discretion to tailor relief to the specific circumstances of the case, balancing the need to sufficiently protect the mortgagee with the debtor’s interest in the property.

For example, the court may permit the mortgagee to commence a foreclosure action—which can take considerable time to complete—but bar the creditor from holding the foreclosure sale or enforcing any foreclosure judgment. The court may also allow the debtor to retain and use the property, provided the debtor makes timely payments for expenses such as taxes and insurance.

Stay relief also must be granted if the debtor has no equity in the property and the property is not necessary for an effective reorganization. See 11 U.S.C. § 362(d)(2)(A)–(B). Most courts hold that a debtor has no equity in the property for purposes of this section when the debts secured by liens on the property exceed its value. A minority of courts, however, may consider only the amounts owed to the moving lienholder and any senior lienholders, particularly in cases where junior lienholders cooperate with the debtor on a Chapter 11 plan and object to senior lienholders’ requests for stay relief.

Regarding the second prong of the test, it is not sufficient for property to be necessary for any reorganization; it must be necessary for an effective one. This means there “must be a reasonable possibility of a successful reorganization within a reasonable time,” and the property in question is necessary in that reorganization.

As a practical matter, obtaining relief from the automatic stay is challenging unless the case is in Chapter 7 and there is little to no equity in the property (or unless the trustee is making adequate protection payments, which, as described below, is unlikely). Generally, courts will not lift the stay unless the creditor presents compelling evidence that the property’s value will decline during the period in which the debtor is permitted to present its reorganization plan.

Right of Secured Creditor or Mortgagee to Adequate Protection

Bankruptcy Code Section 363(e) provides that “at any time, on request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale, or lease as is necessary to provide adequate protection of such interest.” The purpose of this provision is to compensate a secured creditor for any depreciation of its collateral between the time the creditor moved for relief from the stay or for adequate protection, and the confirmation of a plan.

Adequate protection must be “completely compensatory” and should “as nearly as possible under the circumstances of the case provide the creditor with the value of his bargained for rights.” In re Pulliam, 54 B.R. 624, 625 (W.D. Mo. 1985). However, this does not include a creditor’s right to immediate foreclosure.

Section 361 of the Bankruptcy Code provides three ways to offer adequate protection: (1) requiring the debtor or trustee to make periodic cash payments, (2) granting the mortgagee additional or replacement liens, or (3) granting such other relief as will result in realization of the “indubitable equivalent” of the mortgagee’s interest in the property. 11 U.S.C. § 361. These examples are not intended to be exhaustive, but the statute explicitly states that granting an administrative expense claim is not an acceptable means of adequate protection. Id. Section 361 is purely a procedural, rather than substantive, provision that specifies methods by which adequate protection may be provided if required by other sections of the Bankruptcy Code.

The first two methods of providing adequate protection—periodic cash payments (including interest payments to the mortgagee) and additional or replacement liens—are relatively straightforward. In addition to requiring the debtor to provide such payments and protections directly to the mortgagee, the debtor will typically be required to protect the property by paying taxes and ensuring insurance obligations are met. Legislative history and case law suggest that periodic payments may be particularly appropriate for adequate protection purposes when the property in question is depreciating at a relatively fixed rate. Alternatively, courts may grant a lien on unencumbered property of the debtor or a junior lien on encumbered property. The primary challenge with this option is valuing the new collateral to determine whether the protection is adequate. But “mathematical certainty” is not required for a court to find that a replacement lien provides adequate protection.

The third, catch-all provision—providing the “indubitable equivalent”—is less clear. The phrase originates from In re Murel Holding Corp., a case under the former Bankruptcy Act, which held that when a debtor seeks to approve a plan of reorganization over a secured creditor’s objection, the creditor is entitled to treatment providing the “most indubitable equivalence” of its interest in the collateral. 75 F.2d 941, 942 (2d Cir. 1935). Essentially, “indubitable equivalence” means that the treatment afforded the secured creditor must compensate the creditor for the value of its secured claim while ensuring the integrity of the creditor’s collateral position.

Bate Land Co. LP v. Bate Land & Timber LLC, 877 F.3d 188, 192 (4th Cir. 2017) (quoting Richard Levin & Henry J. Sommer, 3 Collier on Bankruptcy § 506.03 (16th ed. 2017)). Although a debtor need not provide full details, there must be reasonable assurance that a suitable substitute will be offered. In re Murel Holding Corp., 75 F.2d at 943. In essence, it must be shown that the treatment afforded the secured creditor “must be adequate to both compensate the secured creditor for the value of its secured claim, and also insure the integrity of the creditor’s collateral position.”

Bate Land Co. LP, 877 F.3d at 192 (quoting Levin & Sommer, supra, § 506.03).

One of the most common forms of adequate protection for an oversecured creditor is demonstrating an “equity cushion.” “Under the ‘equity cushion’ theory, if a debtor has equity in a property sufficient to shield the creditor from either the declining value of the collateral or an increase in the claim from the accrual of interest or expenses, then the creditor is adequately protected.” In re Hamilton, 651 B.R. 499, 507 (Bankr. D.S.C. 2023) (quoting R&J Contr. Servs., LLC v. Vancamp, 652 B.R. 237, 243–44 (D. Md. 2023)). Junior liens on the property are not considered when determining whether an equity cushion exists, as they are subordinated to the liens of senior creditors.

To determine whether a secured creditor is adequately protected by an equity cushion, the court compares the equity cushion to the value of the collateral, not to the claim of the moving creditor. This determination is made on a case-by-case basis, considering factors such as (i) the amount of time since the debtor filed its petition for relief, (ii) the success of the debtor’s post-petition operations, and (iii) evidence regarding the stability of property values. There is no minimum equity percentage considered adequate; even “the most microscopic equity cushion” could suffice “if the chances of jeopardizing the creditor’s interest were also de minimis.” In re Panther Mountain Land Dev., 438 B.R. 169, 191 (Bankr. E.D. Ark. 2010). The general trend, however, suggests that an equity cushion of less than 10% is insufficient, but one exceeding 20% is sufficient. Valuation of collateral for equity cushion purposes is also case-specific, with courts applying various approaches to determine fair market value, including going concern value and liquidation value.

A mortgagee must proactively request adequate protection, as it has no right to obtain it until requested or otherwise granted by the court. The bankruptcy court first determines when the creditor would have obtained its state law remedies had bankruptcy not intervened, which is typically after the creditor seeks relief from the stay. The court then determines the value of the collateral as of that date.

Ability to Seek Bad Faith Dismissal

One other potential remedy for a mortgagee is to seek dismissal of the bankruptcy as being “not filed in good faith.” See 11 U.S.C. § 1112. This provision is intended to protect the mortgagee if the sole purpose of the case is to frustrate the claims or rights of the mortgagee.

Filing of a bankruptcy petition on the eve of a foreclosure or eviction does not, by itself, establish a bad faith filing or “cause” for relief from the stay; it is only one of several indicia that a court may appropriately look to in determining whether, under the totality of the circumstances, the petition was filed in good faith.

1. Rights of an Oversecured Creditor:

Under section 506(b) of the Bankruptcy Code, an oversecured creditor is generally entitled to interest, reasonable fees, costs, or charges under its mortgage agreement to the extent that the value of the property exceeds the mortgagee’s claim. A secured creditor’s claim is secured only to the extent of the collateral’s value. Id. § 506(a) (1). The Supreme Court has held that the value of collateral (and thus the amount of the secured claim) is the price a willing buyer in the debtor’s trade, business, or situation would pay to obtain similar property from a willing seller. Assocs. Com. Corp. v. Rash, 520 U.S. 953, 960 (1997). If the mortgagee is undersecured (meaning its lien is worth less than its claim), its claim will be bifurcated and treated as secured to the extent of the value of its lien on the date the case was filed, with the remaining amount treated as a separate unsecured claim (called a “deficiency claim”). See 11 U.S.C. § 506(a)(1).

There is an exception to this rule under Section 1111(b) to protect undersecured creditors, which can be discussed in the context of plan treatment of secured creditors. This provision allows an undersecured creditor to “elect” to have its entire claim treated as fully secured by the collateral while waiving any deficiency claim. The electing creditor is entitled “to receive payments with a face value equal to the amount of its claim, the present value of which must at least equal the value of the collateral.” In re Hous. Reg’l Sports Network, L.P., 603 B.R. 804, 807 (Bankr. S.D. Tex. 2019) (citing 11 U.S.C. § 1129(b)(2)(A)(i)(II)).

Circumstances where an undersecured creditor might make a section 1111(b) election include (i) when a plan proposes little to no recovery to the unsecured class (which would include its deficiency claim); (ii) when collateral has been undervalued, is inherently difficult to value, or is likely to appreciate in value post-confirmation; or (iii) where the debtor is likely to default on its payment obligations under the plan.

Circumstances where an undersecured creditor might not make the election include (i) if it wants to block confirmation of the plan (where its deficiency claim controls the general unsecured class) or (ii) where the plan proposes to pay the creditor’s secured claim over an unacceptable time frame.

2. Importance of Lien Perfection: To ensure the mortgagee’s rights as a secured creditor in bankruptcy, it is essential that its mortgage lien be properly perfected under non-bankruptcy (real estate) law. Unperfected or improperly perfected liens may be unwound through the provisions of the Bankruptcy Code (see Bankruptcy Code § 544(a)(1)–(3)), which would render the mortgagee an unsecured creditor. See 11 U.S.C. § 544(a) (1)–(3). In short, if there is a defect in the mortgage perfection such that a judgment creditor, execution creditor, or bona fide purchaser would take priority over the mortgagee under non-bankruptcy law, the debtor or trustee will be permitted to “step into the shoes” of such an attacking party and unwind the mortgage under the Bankruptcy Code. Id

3. Debtor in Possession (DIP) Financing: “DIP financing” refers to financing provided to companies in Chapter 11 bankruptcy, enabling them to continue operations. It is distinct from other financing methods because DIP lenders typically receive priority over existing debt, equity, and other claims. Obtaining DIP financing involves numerous requirements and must be approved by the bankruptcy court. See, generally, id. § 364.

The court may grant a “priming lien” (a lien superior to all existing liens) as part of DIP financing if the debtor demonstrates that it could not secure financing without offering a priming lien as an incentive. See id. § 364(c)(2). The debtor also must prove that the interests of the existing lenders being primed are adequately protected. Id. § 364(d)(1)(B). This is where valuation disputes often arise: There must be sufficient equity and other safeguards to ensure that the priming DIP lien does not impair the mortgagee’s rights as they existed at the time the bankruptcy petition was filed. In many cases, to avoid valuation disputes, DIP lenders opt to take a junior lien on encumbered property, subordinated to the mortgagee’s pre-bankruptcy lien.

4. Claims of Debtor or Trustee for Preserving or Disposing of Property: Unless their claims are waived, debtors and trustees are permitted, under Section 506(c) of the Bankruptcy Code, to recover the “reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of the benefit to the holder of such claim.” It is best to negotiate issues regarding 506(c) rights or waivers as soon as possible, particularly in connection with the negotiation of adequate protection payments. Note that if the real property is to be sold in bankruptcy, however, the debtor or trustee will expect to either assert a Section 506(c) claim or negotiate a “carve out” (portion) of any proceeds from the sale of property.

5. Bankruptcy Sale Issues: Section 363 of the Bankruptcy Code generally permits a debtor to sell its property free and clear of liens and claims to maximize returns, even if these are non-ordinary course sales. In many instances, the debtor can sell property subject to liens and encumbrances free and clear of those liens and other interests, even if the parties holding these interests do not consent to such treatment. A debtor must satisfy one of the following conditions:

• Applicable non-bankruptcy law would permit a sale of such property free of the interest. Examples include sales under certain provisions of the Uniform Commercial Code.

• The other entity consents. The entity must consent to the sale free and clear of liens, not merely to the sale of the assets. Consent may be express or implied, although some courts have held that failure to object does not constitute consent under Section 363(f)(2).

• The interest is a lien, and the sale price exceeds the aggregate value of all liens on such property. Some courts interpret the “aggregate value of all liens” as the actual economic value of the liens or the “value” as determined under Section 506(a) (governing the determination of secured status). Other courts hold that the sales price must exceed the face amount of all liens.

• The interest is in bona fide dispute. The debtor bears the burden of demonstrating that there is an objective basis for a factual or legal dispute regarding the validity of the lien or interest.

• The entity could be compelled in a legal or equitable proceeding to accept a monetary satisfaction of the interest. If, under applicable legal or equitable proceedings, the interest holder could be compelled to accept payment in exchange for its interest, the trustee can sell free and clear of this interest. This provision is generally interpreted as contemplating a hypothetical proceeding and does not require the actual satisfaction of the interest from the sale proceeds.

Some courts, however, have rejected this hypothetical approach. For example, the Ninth Circuit Bankruptcy Appellate Panel in Clear Channel rejected the argument that a secured creditor, if subject to cramdown under Section 1129(b)(2) (i.e., forced to accept less than the full value of its claims), allows the property to be sold free and clear under Section 363(f)(5). The court reasoned that this interpretation employs circular reasoning by sanctioning the effect of cramdown without providing the substantive and procedural protections of section 1129(b)(2). Clear Channel Outdoor, Inc. v. Knupfer, 391 B.R. 25, 46 (B.A.P 9th Cir. 2008).

Under Clear Channel, if the first lien lender is undersecured, the debtor cannot sell the property free and clear absent the lender’s consent because the debtor likely cannot satisfy Section 363(f)(5); there is no non-bankruptcy legal or equitable proceeding that would compel the first lien lender to accept monetary satisfaction for less than the full value of its claim.

Other courts have disagreed. For example, the Bankruptcy Court for the Southern District of New York held that “Section 363(f)(5) does not require that the sale price for the property exceed the value of the interests. As recognized in a post-Clear Channel decision from a Bankruptcy Court in the Ninth Circuit, the existence of judicial and nonjudicial foreclosure and enforcement actions under state law can satisfy section 363(f)(5).” In re Boston Generating, LLC, 440 B.R. 302, 333

(Bankr. S.D.N.Y. 2010). Courts remain split on this issue.

It is, however, clear that the estate cannot sell free and clear of an interest (such as a restrictive covenant) that can be enforced only by compelling or restraining certain actions. In most cases, the assets are sold and the liens attach to the proceeds of the sale in the order of their priority, with these proceeds subsequently distributed to lienholders.

If one contests a sale under Section 363 before the Bankruptcy Court and loses, obtaining subsequent relief is almost impossible. Any sale accomplished in good faith under Section 363(m) of the Bankruptcy Code may close notwithstanding the possibility of an appeal, thereby mooting the appeal. A mortgagee’s only recourse would be to obtain a stay of the closing, which is extremely difficult to achieve.

6. Bankruptcy Plan Issues: Typically, in a Chapter 11 bankruptcy plan, the claims of secured creditors are divided into separate classes. If a class of creditors, such as a secured creditor class, votes in favor of the plan—which describes the treatment of the secured creditor’s claim—then the plan’s treatment will govern. But if the creditor does not consent, the debtor may seek to “cram down” the plan treatment of the secured creditor’s claim to force acceptance of the plan’s terms. There are three ways to satisfy the “cramdown” requirements under Bankruptcy Code Section 1129(b)(2)(A):

• Option 1: Requires that (i) holders of such claims retain the liens securing their claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims and (ii) each holder of a claim in such class receives, on account of such claim, deferred cash payments totaling at least the allowed amount of the claim, with a value, as of the effective date of the plan, at least equal to the value of the holder’s interest in the estate’s interest in such property.

• Option 2: If the creditor’s collateral is sold free and clear of liens, the creditor’s liens attach to the proceeds of the sale. This provision is subject to the creditor’s right to credit bid.

• Option 3: As with adequate protection, the creditor may be provided with the “indubitable equivalent” of its interest. One example of “indubitable equivalence” is the unconditional abandonment of the collateral to the creditor. In the alternative, legislative history indicates that a lien on similar collateral would satisfy the “indubitable equivalent” standard; however, courts generally disfavor this approach unless the plan provides for the payment of the present value of the lien and ensures the safety of the principal. On the other hand, in Murel, discussed above, the court refused to confirm a plan that proposed paying a secured creditor interest on its collateral (an apartment building) for 10 years, with full payment of principal due at that time. The plan did not provide for amortization of the principal or maintenance of the building. The court held that the plan was speculative because the creditor would receive neither money nor property nor an equivalent substitute. Additionally, courts have generally not approved so-called “dirt-for-debt” plans, in which a debtor purports to value real estate collateral and then transfers only so much of the collateral as is necessary to satisfy the secured creditor’s claim. This is because real property is unique and determining the value of real property is nearly impossible until it is actually sold.

The Trends, Tips, and the Future

This section discusses current trends, alternatives such as receiverships, and the opportunities that bankruptcy cases present in the real estate market.

Receivership

Receivership proceedings are becoming increasingly common and are a popular alternative to bankruptcy. These are typically state-law proceedings that involve fewer hearings, lower fees, fewer filing requirements, and less transparency. Compared to the Bankruptcy Code, this process varies significantly from state to state and may provide limited due process and standing rights to creditors. Generally, a receiver is a court-appointed nonparty who acts as an “officer of the court” and a fiduciary of the assets placed in the receivership. The receiver is appointed by court order upon motion (typically by a secured creditor). The order can be extraordinarily broad, setting out powers, duties, and payment schedules. The receivership is a temporary role for the duration of the case, with a duty to preserve collateral until an ancillary action, such as foreclosure or determination of possession and ownership rights, is completed.

UCC Sales

The Uniform Commercial Code (UCC) allows a secured creditor to enforce rights through certain nonjudicial remedies, one of which is an “Article 9 sale.” Article 9 of the UCC typically provides the secured creditor with rights to seize and sell collateral the borrower has pledged for a loan. This process also can serve as an alternative strategy to bankruptcy for a debtor. In short, the secured creditor conducts a “commercially reasonable” disposition of the collateral to a new buyer (or to itself). If the sale process is proper, the buyer avoids claims of successor liability, and the debtor’s and guarantors’ liabilities are expunged. This transaction typically does not generate returns for unsecured creditors if the sale proceeds lack equity. In such cases, unsecured creditors are left with remedies unrelated to the business’s collateral. Often, debtors and lenders consensually agree to this process in exchange for a release or reduction of the deficiency obligation to the lender. There are five general steps to an Article 9 sale:

1. The initial transaction that secured the collateral;.

2. Declaration of default under the relevant loan documents and security agreement, along with repossession;

3. Provision by the secured party of a 10-day notice to sell, consistent with Section 611;

4. Maximization of the sale price; and

5. Application of sale proceeds to secured and unsecured debt, consistent with the priority of position.

ABCs—Assignment for the Benefit of Creditors

An assignment for the benefit of creditors (ABC) is used when a business seeks to wind down operations and distribute remaining assets to creditors according to a priority and pro-rata scheme. This alternative to Chapter 7 bankruptcy is often faster and cheaper. In an ABC, assets are voluntarily assigned to an independent, third-party fiduciary “assignee.” The assignee liquidates the business assets and repays creditors with the proceeds.

An ABC reduces liability risks for business owners compared to conducting the wind-down themselves under applicable state law. It also may help avoid the negative publicity associated with bankruptcy.

Preemptive Strikes

Real estate stakeholders can take proactive measures to address potential bankruptcy situations, including:

1. Credit enhancements: Obtaining larger security deposits, letters of credit, surety bonds, third-party or cross-party guarantees, or other measures that provide lien rights or alternative payment options.

2. Remaining vigilant: Terminating a lease before bankruptcy allows landlords to renegotiate new terms post-filing. These terms might include shorter durations, limited premises use, or additional guarantors. Post-petition rent enjoys administrative priority claim status. Creditors also may pursue aggressive collection of past-due rent before bankruptcy, though with the risk of a Section 547 clawback. A creditor, however, should consider all relevant facts and circumstances before terminating a lease prebankruptcy, especially if the lease would be essential to the debtor (or a buyer of its assets) and a substantial pre-bankruptcy debt is owed that would have to be cured (i.e., paid) as part of an assumption of that lease. Once terminated, however, the lease can no longer be assumed and so pre-bankruptcy amounts cannot be paid in full as a cure and will constitute only general unsecured claims. So, sometimes, a landlord can obtain an optimal outcome by not terminating a lease prebankruptcy and working to secure a lease assumption in the bankruptcy case.

3. Post-bankruptcy vigilance: If a debtor breaches post-petition obligations, such as rent payment, creditors should seek relief from the court, including lifting the automatic stay or setting firm deadlines for lease assumption or rejection.

Valuation

Valuation methods and techniques are in flux. Property valuation is a major issue affecting all real estate asset classes in today’s market, affecting lending and sale transactions, litigation, and development transactions.

Recent cases highlight disputes between debtors and creditors over asset valuation, often involving significant disparities in appraisals. Debtors typically argue for higher property values, while creditors aim for realistic assessments. Rising interest rates and stricter lending requirements have made refinancing increasingly challenging, leading to more bankruptcy filings.

To establish a property’s value, running a fair sales process often proves most effective, allowing the market to determine the asset’s worth. Secured creditors can credit bid up to the amount of their claim during these sales. Whether to disclose the credit bid amount publicly depends on the case, as it can either motivate or chill bidding.

Alternative financing sources exist but are typically expensive, with high interest rates. Additionally, lenders are becoming more selective about new borrowers.

Conversion and Policy Restrictions on Property Use

Government and regulatory efforts have supported the real estate market by updating rezoning laws and other regulations to facilitate restructuring and revitalization. Examples of conversions include:

• Harrah’s in Reno to Reno City Center;

• Marriott to student housing in New York;

• Suburban hotel conversions to workforce housing in Clive, Iowa; and

• Conversion of empty commercial offices in downtown Chicago to housing.

By contrast, some agencies have tightened restrictions on private rentals, such as Airbnb and VRBO, funneling economic activity back to traditional hotel facilities.

Conclusion

Bankruptcy, although daunting, does not have to spell disaster for real estate stakeholders. By understanding the interplay between bankruptcy and real estate law, practitioners can navigate challenges effectively, safeguard their clients’ interests, and even uncover opportunities in a distressed market. As the real estate sector adapts to post-pandemic realities, these insights are more critical than ever.