Don't Let Bankrupt Tenant Prorate Last Month's Rent
It’s typical for commercial leases to allow tenants to prorate rent if certain events, such as destruction of the tenant’s space, occur. But when you agreed to rent proration, you probably didn’t intend to let a bankrupt tenant that decides to reject its lease prorate its last month of rent. Rather, you probably expected that the bankrupt tenant would pay its rent for the month in full if that rent became due before it rejected the lease.
If your lease doesn’t clearly set out this tenant obligation, you could be left on the financial hook for the oversight. A bankrupt tenant could argue that it should be permitted to prorate the month’s rent because the inclusion of other rent proration clauses in your lease has given the impression that you’re receptive to rent proration in general—even in a bankruptcy situation. Don’t let that false impression cost you money.
Understand When Problem Arises
In some circumstances, a bankrupt tenant that rejects its lease has a right to prorate that last month’s rent. For instance, if the tenant rejects its lease and moves out of its space before its monthly rent payment becomes due, you’re not entitled to a full month’s rent under bankruptcy laws. Suppose your lease requires a rent payment by the fifth day of each month, but the lease is rejected and the tenant moves out of its space on the third day of the month. You would be entitled to make an administrative claim for rent only for the three days that the tenant occupied the space.
But suppose, instead, that your lease requires the tenant to pay its monthly rent payment by a set day each month—say, the first of the month—and the tenant rejects its lease and moves out of its space on or after that day—say, on the second of the month. Then a rent proration problem could arise. Although you may demand that the tenant pay rent for the entire month, a tenant could argue that you’re entitled to make an administrative claim for only the two days of the month that it occupied its space.
Be Specific in Lease’s Rent Clause
You can protect yourself by setting out rent expectations in the lease. Although a court may not agree with the tenant, you’re better off being prepared for the worst. After all, a court might not sympathize with you and rule in favor of rent proration.
To plug this loophole, add language to your lease’s rent clause that says that the tenant won’t be entitled to prorate its rent—neither the minimum rent nor additional rent—if it rejects its lease on or after the day its monthly rent payment becomes due. This language clearly signals the bankruptcy court that you don’t intend to permit rent proration in this situation. You’ll be in a better position to convince a bankruptcy court that the tenant must pay the entire month’s rent—even if the tenant moves out of its space before the end of that month. You can do this by adding the following language to your lease:
Model Lease Language
Notwithstanding anything contained in this Lease to the contrary, if this Lease is rejected in any bankruptcy action or proceeding filed by or against Tenant, and the effective date of rejection is on or after the date upon which that month’s Rent is due and owing, then the Rent owing under this Lease for the month during which the effective date of such rejection occurs shall be due and payable in full and shall not be prorated.