National Real Estate Investor recently interviewed our New York partner Robert Dremluk to discuss the impact that Subchapter 5 of the U.S. Bankruptcy Code may have on landlords.
Here are some excerpts from Robert’s interview:
Recent revisions to the U.S. Bankruptcy Code might open the door to headaches and heartaches for landlords that rent to small businesses.
In August 2019, Congress created what’s known as Subchapter 5 of the Bankruptcy Code. Subchapter 5 is designed to streamline the Chapter 11 bankruptcy process for small businesses and slash their legal bills, according to Robert Dremluk, a partner in the New York City office of law firm Culhane Meadows Haughian & Walsh PLLC who specializes in bankruptcy cases.
Subchapter 5 went into effect this February. A month later, Congress tweaked Subchapter 5 as part of the federal CARES Act, aimed at helping the U.S. recover from the coronavirus pandemic. A major change in Subchapter 5 that will be on the books till next spring raises the cap on secured and unsecured debts for a small business to qualify for Chapter 11. The threshold jumped from a little over $2.7 million to $7.5 million. “The idea was to create an easier path for companies to reorganize,” Dremluk says.
Legal observers say the re-engineered Subchapter 5 could invite even more small businesses to file for Chapter 11 bankruptcy reorganization and, therefore, entangle more landlords in bankruptcy proceedings.
Through the lens of Subchapter 5, Dremluk sees some positives for landlords. Primary among them is that letting a small business restructure its debt under Subchapter 5 means that a tenant might stand a better chance of keeping its doors open and keeping up with its lease obligations, he notes. He adds that Subchapter 5 paves the way for more small businesses to negotiate with landlords, since some cash-strapped tenants previously found it too expensive to plow through the Chapter 11 bankruptcy process.
It remains to be seen how widely Subchapter 5 will be used by small businesses, according to Rory Vohwinkel, a bankruptcy attorney with Las Vegas law firm Vohwinkel & Associates Ltd. For the most part, small businesses are holding off on bankruptcy filings due to uncertainty over their current and future finances, attorneys say. However, legal observers anticipate a near-tsunami of small business bankruptcies to start when that uncertainty subsides.
“Once those impediments go away, I think you’ll see an upsurge in the use of Subchapter 5,” Dremluk says. “I think a lot of small businesses that have hung on though COVID will see this as an opportunity to clean up their balance sheets, reorganize their business and go forward. But currently, the environment is not really suitable for that.”
As the business community at large adopts a wait-and-see attitude about the coronavirus pandemic and corporate finances, Dremluk suggests that landlords educate themselves about Subchapter 5.
“My recommendation would be for landlords to understand the process, become familiar with how it works, how it’s different from what you might have understood the process to be,” he says. “A landlord who’s asleep at the wheel potentially could end up losing their rights, whatever they may be.”
The complete article can be found here.
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