Commercial Landlords’ Pandemic Preference Defense

The pandemic has changed a lot of things, and commercial real estate is one of them. Many retail locations are struggling to stay open, and offices are reducing their footprints as workers continue to stay home, but the demand for warehouse space is way up. It is going to take a long time for the industry to get back to the way things were, or adjust to the new normal.

In order to give commercial landlords some flexibility while things shake out, Congress passed a temporary change to the preference defense law as part of the Consolidated Appropriations Act of 2021 (CAA). Over the past year, Hanson & Payne has advised several commercial landlords and lessees in the Milwaukee area who have benefited from this legislation.

An Incentive To Negotiate 

The new law, section 547(j) to the Bankruptcy Code, incentivizes landlords to be flexible and provide payment deferments to their tenants by eliminating the fear that payments eventually made will be clawed back as preferences if the tenant ends up filing for bankruptcy. 

Under Subsection 547(j), the trustee is prevented from recovering the following payments made before the bankruptcy as a preferential payment:

  • “payment of rental arrearages” in connection with an “agreement or arrangement” made between a commercial landlord and tenant on or after March 13, 2020 “to defer or postpone rent and other periodic charges” and
  • “payment of supplier arrearages” in connection with an “agreement or arrangement” made on or after March 13, 2020, between a company and a “supplier of goods or services to defer or postpone the payment of amounts due under an executory contract for goods and services.”

Is It Working? 

These provisions have been in place for around a year now, and we are starting to see them make a difference in the Milwaukee area. They seem to be doing what Congress intended — allowing commercial landlords to work with lessees who are struggling to make payments due to disruptions caused by the pandemic (including supply chain disruptions and shifting consumer behaviors). When lessees do end up filing for bankruptcy, landlords are successfully using this new preference to hold on to the money they were paid in the last few months.

A Temporary Fix

Unless it is extended, this new preference defense is set to expire on December 27, 2022. Landlords need to keep this in mind as they negotiate with struggling lessees. 

It is possible that the expiration date will be extended since the impact of the pandemic is ongoing, but there are no guarantees. 

Landlords should consider what other preference defenses might be available to them, and structure their relationship with troubled tenants in order to take advantage of them. 

Experienced Milwaukee Bankruptcy Attorneys You Can Trust 

Hanson & Payne’s experienced team of bankruptcy attorneys is helping debtors and creditors in the Milwaukee area navigate the financial storm brought on by the pandemic. Our familiarity with the Milwaukee area’s commercial real estate market means we are well suited to assisting landlords and lessees who are in financial distress.  Please contact our office today to schedule an initial consultation.