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Making the matter more complicated is the imposition of an "automatic stay" immediately upon the filing, which precludes creditors, including landlords, from taking action without court authorization. A landlord can, however, better anticipate (and even negotiate) the treatment of the lease with knowledge of the process and options available to both sides.

A key question is whether the lease remains current and enforceable. A debtor cannot revive a lease that ended prior to the filing, but provisions that would terminate the lease upon the filing are void under the Bankruptcy Code. If the lease ended prior to the filing and there are related damages, landlords can assert a claim against the debtor.

If the lease is current, debtors have a few options, subject to review and approval of the bankruptcy court. The debtor can continue to operate under the lease, sell ("assume and assign") the lease to a third party, or reject the lease. The debtor's decision is typically driven by the lease's value and, if the debtor intends to continue to operate after bankruptcy, whether the lease benefits the debtor's business.

The debtor gets 60 days after the filing to decide what to do, a time period which can be extended by the bankruptcy court. Although the automatic stay will continue to preclude affirmative actions by the landlord without court approval, the debtor must continue to make payments, known as "administrative rent," until the court enters an order regarding the lease. If the debtor fails to make payments, the landlord is entitled to an "administrative priority" claim, which must be paid before the debtor's other general unsecured creditors.

When the debtor files for bankruptcy in the middle of a payment period, and payment is due post-petition, courts disagree on how much of the payment qualifies as administrative rent. Most courts will prorate payment based on days spent in bankruptcy, with only amounts that accrue after the filing qualifying as administrative rent. Some courts, however, require the full amount be paid immediately when due.

If debtors opt to continue under the lease, they must cure any monetary and non-monetary defaults under the lease and provide "adequate assurance" that they can continue to pay. This is typically shown by demonstrating that the debtor is current on rent and can make future payments. If the property is in a shopping center, the debtor must also show the source of rent and other obligations coming due, that any percentage rent due under the lease will not decline substantially, the ability to comply with all lease provisions – including those designed to maintain the shopping center's desired makeup -- and that there will be no disruption of tenant mix or balance.

It's important to note that if the debtor assumes the lease, landlords are protected from future "preference" actions, or lawsuits that a debtor (or bankruptcy trustee) may bring against creditors, to retrieve payments considered to be "preferred" that are made during the 90 days before the bankruptcy filing. Landlords should be mindful of preference actions when negotiating payment of past-due rent.

If the lease is considered "below market," meaning it has value, debtors who don't want to continue operating at that location can assume and then sell ("assign") the lease to a third party to raise funds for the debtor's bankruptcy estate. The requirements for assuming the lease are the same, but the debtor must instead demonstrate "adequate assurance" that the new tenant can perform under the lease. The debtor may be permitted to re-write certain provisions of an assigned lease (i.e. clauses that restrict assignment). However, courts will generally not allow revision or removal of terms material to the lease or economically significant to landlords.

The debtor also can seek to exit, or reject, the lease, which only requires showing the decision is in the debtor's business judgment, which is rarely questioned by the court. Additionally, a lease will be deemed rejected if the period to assume or reject expires and the debtor fails to take action. Rejection is considered a breach, giving rise to a claim for damages that may be asserted against the debtor. The damages that a landlord can assert are capped, however, to avoid potentially large reserved rent claims.

If the lease ended before the filing or is rejected or is breached after it was assumed, landlords can assert a claim against the debtor and the court will set a deadline for asserting the landlord's claim. For obligations that arose before the filing, landlords may assert a general unsecured claim to be paid pro rata (likely cents on the dollar) from whatever funds remain after the debtor has paid its secured creditors and other priority payments. For obligations after the filing, such as administrative rent, landlords can assert an administrative priority claim that must be paid in full before the debtor can pay other unsecured creditors.

So, how can landlords protect themselves? There is no true way to anticipate tenants' bankruptcy claims – but landlords should work to understand tenants' financial conditions, through financial statements or affirmative representations. This is particularly important when negotiating payment of past-due rent, as any payments received in the 90 days before the bankruptcy filing are vulnerable to preference actions. Instead, landlords may opt to forgive past-due rent and negotiate a new lease to make up for lost payments. And once a tenant has filed for bankruptcy, landlords should stay abreast of the case, particularly the deadline by which the debtor must assume or reject leases and the deadline to assert claims, and work with the debtor and its lawyers to obtain proper treatment.