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Is a Master Lease to Operate Healthcare Facility Classified As ‘Residential’ or ‘Nonresidential’ In Bankruptcy?
The lifeblood of any debtor operating in Chapter 11 is access to cash to maintain ongoing operations. This is particularly important in cases involving assisted living and skilled nursing facilities given the health, safety, and welfare concerns with respect to their residents. One of the most significant calls on cash involves post-petition rent obligations due on leased facilities. Under Section 365(d)(3) of the Bankruptcy Code, post-petition obligations with respect to leased “nonresidential real property” must be timely paid. While the code draws a distinction between residential and nonresidential real property, there is no explicit definition of “nonresidential,” thus creating difficult issues in certain health care cases.
In a recent decision, the U.S. Bankruptcy Court for the Western District of Pennsylvania tackled this problem in a Chapter 11 involving Guardian Elder Care at Johnstown, LLC, d/b/a Richland Healthcare and Rehabilitation Center. See, In re Guardian Elder Care at Johnstown, No. 24-70299-JAD, 2024 WL 4799907 (Bankr. W.D. Pa. Nov. 15, 2024). At issue was whether a master lease to operate an occupied healthcare facility should be classified as “residential” or “nonresidential” real property under Section 365(d)(3). If the court determined that this was a lease for nonresidential real property, timely payment of post-petition rent would be required.
Guardian Care and its affiliates entered into a master lease agreement with a real estate investment trust involving several properties operated as personal care and nursing home facilities with approximately 1143 licensed beds and 950 residents. In July 2024, the debtors moved to either sell or otherwise transition their facilities to another buyer or operator without interrupting patient care. The debtors also sought authorization to use cash collateral and obtain debtor-in-possession financing to carry out the planned transactions. Although the landlords supported this plan and entered into new leases with the proposed buyers, they were concerned the DIP financing did not provide for the immediate payment of post-petition rent or other accrued charges under the master lease. The landlords argued that under Section 365(d)(3) those obligations should have been provided for in the DIP budget because their facilities were “nonresidential.”
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