When a tenant declares bankruptcy, landlords must often navigate a difficult situation. One challenge for landlords is that when the tenant files a bankruptcy petition, an “automatic stay” immediately applies, which can prevent the landlord from sending notices or pursuing legal action to evict the tenant. One Connecticut bankruptcy case, however, shows that in the commercial landlord/tenant context, a landlord’s timing in issuing a notice to quit may avoid imposition of an automatic stay.
In the case In re Masterworks, Inc., 94 B.R. 262, 264 (Bankr. D. Conn. 1988), the landlord issued a notice to quit to its commercial tenant Masterworks, a retail outlet, due to Masterworks’ failure to pay rent. Three days later, Masterworks filed for Chapter 11 bankruptcy. The landlord sought to lift the automatic stay imposed by the bankruptcy filing so that it could evict Masterworks. Masterworks sought for the lease to “assumed” so that the lease would be ongoing throughout the bankruptcy case. The Court held that the service of the notice to quit terminated the lease and all of the tenant’s rights under that lease. Therefore there was no lease in place to assume when the tenant filed for bankruptcy, and the landlord was free to move forward with a proceeding to evict Masterworks.
There were additional issues in Masterworks, including interpretation of the lease at issue and Connecticut’s anti-forfeiture doctrine, but the main takeaway is that commercial landlords who (1) have grounds to terminate a lease and (2) have reasons to suspect that a tenant may file for bankruptcy should be proactive in issuing a notice to quit.
