'What happens to sub-leases if a tenant is declared insolvent?'

'What happens to sub-leases if a tenant is declared insolvent?'

With commercial property management, there are cases that differ from residential letting in that there tend to be more sub-leases than in residential rentals, says Michael Bauer, general manager of the property management company IHFM.

It often happens that one company will rent a whole building and then sub-let portions of the space they have signed for and it must be remembered in these cases that the entity ultimately responsible for the rent is the company that signed the original lease with the landlord, he said.

But what happens in cases where the company that holds the lease is goes bankrupt?

Most commercial leases will be held by a juristic person, that is, a company or a close corporation, he said. If the company were to go under, the liquidator continues steps in and performs the duties of the tenant, and must collect rent from sub-lets as well as pay over rental to the landlord.

'If the business that goes under applies for business rescue, then they will be protected and have time to unwind and sort out their financial problems, and this might include cancelling the lease,' said Bauer.

What many don't realise is that, if the liquidator cancels the lease, the landlord joins the line of creditors with concurrent claims against the first tenant for the loss in rent, but if the lease stays in place, then all rights and obligations regarding that lease and the insolvent tenant stay in place, he said. Furthermore, the landlord cannot force the liquidator to fulfil the contractual obligations of the lease, such as paying the rent or maintaining the property.

'It makes sense then that the liquidator would cancel the lease, as this reduces the burden on him to get payments out to the creditors,' said Bauer.

The subtenant does not have any more rights to the property than the tenant and in cases where the main tenant is declared insolvent, the lease can be cancelled with no repercussions on either the landlord or liquidator's part. Once the main lease is cancelled, so too, is the sub-tenant's lease, he said.

IHFM Press Release

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Denny Crane

Denny Crane
It's not me ... yet. Denny Crane from the TV series Boston Legal. Click on picture if you're not sure who he is!