In today's commercial real estate market, the possibility that your landlord will declare bankruptcy is very real making it important that tenants are aware of their rights. When a landlord declares bankruptcy under Chapter 11 of the Bankruptcy Code, the bankruptcy trustee (the person or entity placed in charge of the landlord's assets) is given the power to determine whether to accept or reject tenant leases.
If the bankruptcy trustee decides to accept a lease then the tenant must continue to satisfy its obligations thereunder as if the bankruptcy never happened. Both the landlord and tenant remain obligated to perform. Before the trustee can accept the lease, however, it must obtain permission from the bankruptcy court, cure any defaults that arose under the lease, compensate the tenant for any losses arising from the landlord's breach, and provide sufficient assurances that the landlord will be able to perform its obligations under the lease in the future.
In the event the trustee rejects an unexpired lease, the tenant may terminate the lease so long as the rejection amounts to a breach under the terms of the lease or under applicable bankruptcy law. Alternatively, the tenant may opt to retain its rights under the lease, including rights to continued possession of the premises, rental amounts, due dates, use rights, exclusivity, quiet enjoyment and assignment. Essentially, tenants retain rights that are in or appurtenant to the real property for the balance of the lease term and any enforceable renewal or extension periods. However, the trustee is relieved from lease obligations requiring future performance by the landlord such as the provision of utilities, repair and maintenance and janitorial services. Tenants who opt to retain their rights after the trustee has rejected the lease are entitled to offset damages caused by the rejection and resultant failure of landlord to perform its obligations under the lease against rent due under the lease. This becomes tenants' exclusive remedy for landlords' failure to perform.
Generally, the rejection of a lease by a bankruptcy trustee doesn't void the underlying lease but, rather, provides the tenant with a general unsecured claim against the estate. Consequently, such a claim should accrue to tenants who elect to treat an unexpired lease as terminated and vacate the premises after the trustee's rejection in bankruptcy. A tenant desirous of obtaining a security deposit is also an unsecured creditor and said obligation by the landlord may be discharged.