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  4.  » What happens to a company’s lease during a business bankruptcy?

What happens to a company’s lease during a business bankruptcy?

Having control over operational costs is crucial for the financial success of a company. It can be prohibitively difficult to ensure that a company can profit off of transactions unless it can control its basic expenses. Many business expenses are recurring costs that a company locks in via contract. Employee wages, vendor deliveries and also the rental cost of the physical space where a company operates can create a massive burden on a month-to-month basis that a business may struggle to cover. A company can terminate some of those costs quickly, but others may be non-negotiable if the company plans to remain operational.

Depending on the circumstances of any given moment, certain recurring costs can potentially consume all of the profit that a company generates. A business bankruptcy can be an opportunity to discharge debts, stop collection activity and potentially restructure a struggling business so that it can potentially become far more resilient than it is at present. Take, for example, commercial leases. By managing this recurring cost in certain ways, a business can find that its leasing obligations are suddenly much more manageable.

There are multiple options for leases

A lease is a type of executory contract, and there are special bankruptcy rules for such agreements. Given that leases can lock an organization into multiple years of financial obligations, being able to change or end those recurring costs could make a major difference to a company trying to regain financial control after a difficult period.

The party filing for bankruptcy will have several options. They can reaffirm the lease and continue operating in the same facilities. In some cases, they may be able to renegotiate some of the terms of the lease to make it more realistic for them to complete the lease. Other times, they may be able to assign the lease to another party, which will lead to someone else occupying the space. Ending the lease could also be an option.

When a business has begun to struggle to meet basic operational expenses, terminating leases at certain facilities or renegotiating the terms of a lease could potentially be the best solution to help that company overcome its short-term financial challenges and become solvent again. Knowing how bankruptcy affects different types of financial obligations can help executives and owners choose the right path forward for their company that is experiencing financial challenges.