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A thought on US bankruptcy law

 


The arbitrage of rental periods turns out to be a somewhat common (or at any rate a not-too-rare) business model. A company or other business entity can enter the market as a tenant, taking long-term rental properties, and then turn around and serve as landlord, leasing out the same spaces (perhaps after renovating them, etc.) to shorter-term and higher-rent paying tenants.

If this works: great!  The arbitrager has one stream of money going out the door and another larger stream coming in the door.  

If it doesn't work ... the relations between a landlord and a tenant can become a complicated matter once the tenant has placed itself under the protection of a bankruptcy court by way of a chapter 11 filing. As sub-lessor tenants attempting this arbitrage play have done repeatedly. 

This isn't the most exciting subject in the world but, hey, this is a hobby blog. My hobby blog. I may come up with something that interests you more the next time. 

If a business declares bankruptcy in the middle of a rental month, and it has not paid that month's rent, In bankruptcy law, the term Stub Rent refers specifically to the rent incurred from the date of the filing of a bankruptcy petition through the end of that rental period, typically a month. The Stub Rent is what was specifically at issue in a well-known case on the failure of HQ Global, a pioneer rent-arbitrager. It is also an issue in the WeWork matter, but is in principle distinct from the issue of fair use payments for continuing estate administration, the bigger issue of WeWork.

The issue of the priority (or lack thereof) for a landlord's claim for the stub rent is convoluted, and distinct points of view are taken. Landlords would of course like the matter to be treated as high priority on a level with employee wages. But the circuits are split.

Unpaid pre-bankruptcy rent in a commercial property lease is an unsecured claim, and landlords go to the ‘back of the line’ with other such claimants with regard to that claim. On the other hand, obligations incurred after the filing, or properly speaking after the “stub” period, may become an expense priority entitled to full payment. They get to the front of the line.


A debtor tenant that needs some muscle for purposes of negotiation can seek to string along the question of its assumption/rejection of leases. Although the statute deliberately seeks to limit opportunities for such games-playing, they do exist.

The WeWork case has brought many of these issues front-and-center.  And there may be a number of cases forthcoming. The arbitraging of commercial rents is not an uncommon business model, and it is the sort of thing bound to create Stub Rent controversies galore. 

Fun times. 

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