You bought the building eighteen months ago. Single tenant, national chain, investment grade rating at the time, eleven years left on the lease at $240,000 a year.
In November the chain files for Chapter 11.
Your instinct is to reach for the lease, because the lease says eleven years. From the moment of that filing, the lease is no longer the document that governs. The bankruptcy code is.
What the filing actually does
Three things happen more or less at once.
The automatic stay stops you. You cannot evict, you cannot enforce remedies, and in many cases you cannot draw on collateral without first asking the court. Whatever the lease entitles you to do, you are now waiting.
The debtor gets to choose. The tenant may assume the lease and continue, which requires curing defaults and giving adequate assurance it can perform. It may assume and assign the lease to somebody else. Or it may reject the lease, hand the space back, and walk away from the remaining term.
Your damages are capped by statute. This is the part that surprises landlords most. A rejection is treated as a breach, but your claim for the remaining term is limited rather than calculated. The cap is commonly described as the greater of one year's rent or fifteen percent of the rent for the remaining term, not exceeding three years. And what is left is a general unsecured claim, which is paid out of whatever remains after secured and priority creditors.
The arithmetic on that building
| Amount | |
|---|---|
| Remaining term at filing | 11 years |
| Contract rent remaining | $2,640,000 |
| 15% of remaining rent | $396,000 |
| One year's rent | $240,000 |
| Capped claim, the greater of the two | $396,000 |
| Illustrative unsecured recovery at 10 cents | about $39,600 |
Illustrative only. Recovery on unsecured claims varies enormously from case to case and is often far less than creditors hope. The shape is what matters: $2,640,000 of contractual income becomes a claim of $396,000, which becomes a payment that may be a rounding error.
Meanwhile you own an empty building, and the dark asset problem arrives on top.
The risk nobody prices: assignment
Rejection is the loud outcome. Assignment is the quiet one.
A lease can generally be assumed and assigned in bankruptcy even where your lease contains a clause prohibiting assignment, because those restrictions are largely unenforceable against a debtor in this context. The court's test is adequate assurance of future performance, not your preference.
So the investment grade credit you underwrote can be replaced by an operator you have never heard of, at the same rent, with your consent rights substantially weakened. The rent may continue. The credit that justified your cap rate does not.
What to check before you buy one
- Find the guarantor. A parent company guarantee from a solvent entity that has not filed can be worth more than the lease itself. Confirm whether one exists, who gives it, and what survives a tenant filing.
- Prefer a letter of credit to a cash security deposit. Landlords and their counsel generally regard an LOC as the stronger position when a tenant files. Your attorney should confirm the specifics for your lease.
- Get sales reporting if you can. Store level sales are the earliest signal that a location is on a closure list, long before any filing.
- Underwrite the trajectory, not the rating. A rating is a snapshot. Look at the chain's store count, recent closures, and debt maturities.
- Confirm it through estoppels, not the seller's summary.
Why this lands hardest on exchangers
Two familiar reasons. A 45-day window is not long enough to underwrite corporate credit properly, so buyers lean on the rating and the brand. And after closing there is no cash left to carry an empty building, because full reinvestment is what avoided boot in the first place.
Single tenant property concentrates that into a binary outcome. It is a genuine argument for diversification, whether across several smaller assets or through a DST holding a portfolio, though a DST removes your control over how a tenant default is handled rather than removing the risk. DSTs are offered to accredited investors through private placement and carry real risks including illiquidity, fees, and loss of principal.
Bankruptcy outcomes turn on the specific case, the jurisdiction and the lease, so this is the shape of the question rather than the answer for your property. Your attorney advises on your lease, and building that credit work into the diligence sequence is part of our exchange process.
Common questions about tenant bankruptcy
Can a bankrupt tenant simply cancel my lease?
It can reject the lease, which ends it and gives you a damages claim rather than continued rent. It may instead assume the lease and continue performing.
Why is my claim so much smaller than the remaining rent?
Statute caps landlord claims, commonly described as the greater of one year's rent or fifteen percent of the remaining term up to three years. The capped amount is then an unsecured claim.
Can the lease be assigned to a different company?
Yes, and anti-assignment clauses are largely unenforceable in bankruptcy. The court looks for adequate assurance of future performance rather than your approval.
Does a corporate guarantee help?
It can be decisive, if the guarantor is solvent and has not filed. Confirm the guarantee exists and what it covers before you buy.
Is a security deposit or a letter of credit better?
Landlords generally prefer a letter of credit when a tenant files. Ask your attorney to review how your specific lease and collateral would be treated.
Disclosure: Numerical example is for illustration purposes only; individual circumstances will vary.