In Bow to Pandemic, Court Authorizes Debtor’s Suspension of Rent Payments in Chapter 11 Case

05.12.2020

In the not-so-long-ago days before COVID-19, when a business filed for bankruptcy under chapter 11, it was expected to pay the post-petition rent due to each of its landlords until the bankruptcy case ended or the debtor “rejected” a particular lease. The Bankruptcy Code is unambiguous that a debtor must “timely perform all the obligations . . . under any unexpired lease of nonresidential real property.” But this seemingly inflexible rule is starting to bend in the face of the unprecedented economic realities resulting from the coronavirus pandemic. In particular, some bankruptcy courts have recently been willing to let debtors temporarily suspend rent payments in the exercise of the debtor’s business judgment.

This new judicial flexibility is reflected in a recent order of the bankruptcy court presiding over the Pier 1 Imports bankruptcy case in Richmond, Virginia. Over the strenuous objection of numerous landlords, the court in the Pier 1 case authorized the debtor to defer paying rent to its landlords at least through the month of May and perhaps longer if the debtor is unable to open its stores and resume some semblance of normal operations by June 1. After documenting the impact that COVID-19 had on the debtor, its projected reorganization plan, and the world economy, the court granted the debtor’s motion to pay only certain expenses identified as “critical,” which did not include rent payments. 

The court in the Pier 1 case made clear that its decision did not constitute a ruling on any substantive issue of contract law (such as whether COVID-19 qualified as a natural disaster or similar event that might give the debtor the right under its leases to suspend rent). The court also noted that it was only authorizing the debtor to suspend and accrue rent payments – the rent was not being forgiven and would have to be paid in order for the debtor to obtain confirmation of a plan of reorganization. Additionally, because the debtor projected being able to begin catch-up payments in mid-July if it is able to reopen its stores by June 1, and because ongoing utility bills and insurance premiums were still being paid, the court found that the landlords’ interests were adequately protected notwithstanding the deferral of rent payments. The order reflects both the enormous economic strains the pandemic has thrust upon retailers and the willingness of the bankruptcy courts to make at least short term adjustments to the ordinary rules in an effort to give companies a fighting chance to survive in the face of those strains.