Tenants often have enough to worry about with their rental properties without having to wonder about what happens to their rights when a landlord declares bankruptcy. Rental properties often have special entity protections that reduce the chances that a rental property is affected if a landlord defaults on the property's mortgage. If the rental property is given up by the landlord during the course of bankruptcy proceedings, a tenant has the right to remain committed to the original lease and stay at the property.
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Special Purpose Entity
Commercial rental properties are somewhat more protected from bankruptcy proceedings when compared to residential properties because of the insurance provided by special purpose bankruptcy remote entities (SPEs). Special purpose entities are properties where the mortgage has been securitised by the lender as a separate legal entity to protect against landlord bankruptcy. New York State Southern District courts rulings in 2009 and 2010 created stricter regulations for legal SPE bankruptcy proceedings, including increasing the number of directors appointed during bankruptcy from one to two.
Once a landlord files for bankruptcy, all assets, including rental properties, are placed in a legal bankruptcy estate to be managed by a trustee or remain the possession of the landlord, who acts as a debtor in possession, depending on state law. At this time, the landlord has the option to assume all unexpired tenant leases, keeping the predetermined rental schedule, or reject those leases and attempt to lease those properties out again.
When a lease becomes rejected by the landlord, a tenant can either accept the landlord's lease termination and move out of the rental property or may continue to make all scheduled payments and remain in the property. However, if the tenant decides to remain, some of the landlord's legal responsibilities are transferred to the tenant, making it problematic to stay in a multiple unit apartment complex after a landlord gives it up through bankruptcy.
During a landlord's bankruptcy proceedings, tenants retain all of the rights that they enjoyed as tenants prior to the bankruptcy filing. Tenants may also have additional legal recourse as a creditor once the landlord declares a rejection of the original lease. Tenants may also be able to reduce their rent payment to the landlord if the landlord is unable to maintain certain services due to bankruptcy that they are legally required to maintain, such as heat or electric power.
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