One common consequence of the corona virus is that small business owners have fallen far behind in the payments of rents for their stores, offices and factories. Landlords have treated these substantial arranges in various ways either by formally restructuring leases, or entering into formal or informal arrangements to deal with the substantial accrued arrears. However, because the economy has not rebounded as quickly as had been hoped or anticipated, and because landlord-tenant courts are recovering from their substantial backlog, more and more landlords have moved forward in landlord-tenant courts to terminate leases as additional leverage to enforce past due and current rents.
Small business owners such as restaurateurs, shopkeepers and gas station owners, to mention just several of the more common categories, consider a bankruptcy filing to stave off eviction, but often only after the landlord-tenant action has been concluded and the landlord has obtained a warrant of eviction.
For the last forty (40) years, such attempts to stave off evictions were belated in light of the exact language of New York Real Property Actions and Proceedings Law (“RPAPL”) Section 749.3. which had stated: “The issuing of a warrant for the removal of a tenant cancels the agreement under which the person removed held the premises, and annuls the relation of landlord and tenant”. In other words, under this statutory language, once a warrant of eviction is issued, there is no longer a lease to be protected and preserved in a bankruptcy case. See In re Darwin, 22 BR 259 (Banker. E.D.N.Y. 1982). Accord In re Island Helicopters, 211 BR 453 (Banker. E.D.N.Y. 1997); In re W.A.S. Food Service Corp., 49 BR 969 (Banker. S.D.N.Y. 1995).
Under these older cases, we were unable to use the bankruptcy process to save business leases once the warrant of eviction had been issued. Thus, it is very exciting that on June 14, 2019, RPAPL Section 749(3) was amended to delete the language pertaining to the issuance of the warrant of eviction terminating the lease. This deletion of this problematic language was noted with approval in In re Pa yam, Inc., 642 BR 365 (S.D.N.Y. August 10, 2022). Under this change, it appears that in subsequent cases, even if a warrant of eviction had been issued, a bankruptcy filing can be utilized to preserve a defaulted non-residential lease.
Accordingly, small business owners should be aware that under the revised law, they may have the opportunity to reorganize and preserve their leasehold even though a landlord-tenant proceeding continued through to an adverse determination. Under Pa yam and under RPAPL 749(3), businesses that previously could not be saved, may now be able to successfully reorganize.
Robert L. Pryor is a partner in the West bury N.Y. firm of Pryor and Mandelup LLP and has practiced bankruptcy law for over 30 years. He is a Chapter 7 Trustee and Former Law Clerk to Hon. C. Albert Parente, Chief Bankruptcy Judge of the Eastern District of New York.