Signs of Tenant Distress — and What to do About it

The economy may be on the upswing, but many businesses are still struggling. That means you could be at risk of tenants filing for bankruptcy, leaving you in the lurch for past and future rents due. By keeping an eye out for hints of financial distress, you may be able to minimize the loss from a tenant’s bankruptcy.

Recognize red flags of distress

How do you know that a tenant may be struggling? If tenants pay the rent late, request extensions, make partial payments or ask you to hold their checks for a few days, they might be having some cash flow issues. Failing to satisfy maintenance and similar obligations can be another sign of insufficient cash flow.

Visit your tenants on a regular basis and look for reductions in operating hours, customer foot traffic and inventory levels. And don’t forget to keep your ears peeled in the local business community. For instance, you might hear rumors on the golf course or at a Rotary Club meeting that creditors have taken action against a tenant, such as filing a lawsuit. In that case, a race to the courthouse can’t be far behind, as creditors line up to get priority in a bankruptcy filing.

Know your rights

If a tenant does file for bankruptcy, protect your interests and stay on top of important deadlines, such as when a tenant must assume or reject an unexpired lease. In a Chapter 7 liquidation bankruptcy, a tenant has 60 days to assume or reject the lease, unless the court extends that period. If the tenant fails to make all payments due during the decision period, ask the court for permission to seek remedies, including repossession. Consult an attorney about obtaining a court order to evict a tenant, however, rather than taking unilateral action.

An attorney also can bring you up to speed on the rules regarding assumption or assignment of the lease. For example, a tenant must remedy lease defaults before assuming a lease. In addition, the tenant must provide “adequate assurance” of the lease’s future performance, typically in the form of a deposit or letter of credit.

You might be entitled to damages if the tenant rejects a lease with at least one year left in the term. Damages will equal the greater of a year’s rent or 15% of the rent over the remaining term, not exceeding three years.

Stay alert

Tenants rarely tumble into bankruptcy without showing battle signs as they fight to survive. By staying alert, you can reduce the risk of being caught off guard.

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