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Leased Property in Bankruptcy: Residential vs. Non-Residential

By Janice G. Inman

When a person or business entity files for bankruptcy, many of that petitioning debtor's assets will be protected from immediate seizure or other taking by the Bankruptcy Code's automatic stay provisions. Such provisions enjoin creditors from taking any action to collect debts or repossess property (with certain exceptions), and they come into force at the moment the bankruptcy petition is filed.

When the property in question is non-residential real property held by the bankruptcy petitioner through a lease, creditors are initially prevented from moving to repossess the property, but only for a short time, unless the bankruptcy trustee takes certain actions. For example, 11 U.S.C. §365 covers executory contracts and unexpired leases. Section 365(d)(4) states that if the trustee does not assume or reject an unexpired lease of nonresidential real property under which the debtor is the lessee within a prescribed amount of time, then such lease is deemed rejected and the trustee is required to immediately surrender the nonresidential real property to the lessor. A code provision like this should spur a bankruptcy trustee to act quickly to assume or reject a debtor's unexpired leases on nonresidential property, on pain of losing the automatic stay protections.

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