Tenants in distress

Belgian Insolvency law mainly consists of two separate regimes: bankruptcy (Belgian Bankruptcy Act of 8 August 1997) and judicial reorganisation (Belgian Continuity Act of 31 January 2009).

While the bankruptcy regime merely aims at selling off the debtor’s assets and distributing the proceeds among the creditors (based on their ranking under the law), the continuity regime aims to rehabilitate the debtor. In other words, the bankruptcy regime may be described as a liquidation regime and the continuity regime, as a rescue regime.

The 2014 figures, available in Belgium, show that the number of bankruptcies (11,294) and judicial reorganisations (1,116) decreased slightly, compared to the year 2013. Despite this good news, it is feared that this auspicious trend will not last long. Some commentators predict that as much as 40 percent of Belgian companies may file for bankruptcy within the next 10 years . Insolvency law will thus remain a hot topic in the coming years.

Insolvency also raises important issues in the field of real estate, where either the landlord or the tenant may find themselves subject to bankruptcy or judicial reorganisation proceedings.

In what follows, we will deal with the question of tenant insolvency (bankruptcy and judicial reorganisation) through the lens of three issues that frequently arise in practice: (i) payment/enforcement of the landlord’s claim, (ii) termination of the lease agreement, (iii) eviction of the tenant.

Payment / enforcement of the claim

In a bankruptcy scenario, theoretically, all future rent under a lease becomes due and payable. However, once an order in bankruptcy has been issued, individual enforcement creditors’ rights are suspended, subject to limited exceptions. In other words, the landlord can no longer enforce his claim on the tenant’s assets.

The landlord will have to file (in due time) a statement of claim which includes all the unpaid rent (past and future) and his preferential status granted by law. In practice, however, three hypotheses must be distinguished.

  • First, the receiver in bankruptcy, appointed by the relevant commercial court (displacement of the debtor), may decide to continue the lease agreement. In this case, the rent which becomes due after that decision by the receiver in bankruptcy, will be considered as debts of the estate (super privileged).
  • Secondly, the receiver in bankruptcy may try to negotiate an amicable termination of the current lease in parallel with the signing of a new, short term lease to allow the temporary continuity of the tenant’s activities. In this case, the landlord will negotiate an up-front payment of the rent relating to the new (short-term) leas
  • Thirdly, the receiver in bankruptcy may decide not to allow the temporary continuation of the tenant’s business and to terminate the lease, as he is empowered to under the Bankruptcy Act.

In a judicial reorganisation scenario, it should be noted that, in principle, the tenant remains in charge of running his business, and may still voluntarily pay his business debts provided that the payments are justified on the basis of continuity.

In addition, the moratorium, which is granted to the debtor in judicial reorganisation and which entails the general suspension of any creditors’ enforcement rights, does not preclude the landlord from enforcing his claim on the debtor’s assets for unpaid rent relating to the period following the opening of the judicial reorganisation. Claims relating to such rents are not subject to the moratorium.

Termination of the lease agreement

In a bankruptcy scenario, and despite pending bankruptcy proceedings, the landlord may initiate proceedings to terminate the lease for non-performance of the debtor’s obligations (non-payment of rent).

It is also possible that the lease agreement contains a clause providing that the lease will automatically end in the event of the tenant’s bankruptcy. Such a clause is, in principle, valid and is referred to as a condition subsequent (i.e. application as of right and without fault). This kind of clause must be distinguished from a mere termination clause, which does not provide for the automatic termination of the contract and relies upon the fault of the other party. A termination clause is ineffective in the field of real estate.

Finally, when appointed, the receiver in bankruptcy must decide whether or not to continue any existing contract. His decision to terminate an existing contract must be justified on the grounds that to pursue the contract would be an impediment to the liquidation of the debtor’s business. It is, therefore, not enough to show that the contract would lead to a reduction in the value to the bankrupts’ assets, in order to terminate a lease.

If the receiver in bankruptcy fails to take a decision, the landlord may put him on notice to do so. If no decision is taken within 15 days of that notice, the lease will be considered as terminated.

In a judicial reorganisation scenario, the tenant may decline to perform his duties under the lease (e.g. payment of the rent) provided that, in particular, the non-performance is notified to the landlord within 14 days of the opening of the proceedings.

In this case, it is uncertain whether the landlord could lawfully terminate the lease based on such non-performance (there is no clear cut view on this issue).

Moreover, from the landlord’s perspective, a default (which occurred before the moratorium) under the lease agreement cannot justify the termination of the lease unless the tenant remedy such default within 15 days of a formal notice of default sent by the landlord.

Eviction of the tenant

In the event of the tenant’s bankruptcy, the landlord is entitled by law to repossess the premises but this may be delayed as the receiver in bankruptcy must, among other things, have the necessary time to sell off the movable assets that were in the premises.

In a judicial reorganisation, an tenancy eviction based on unpaid rent for the period following the opening of the judicial reorganisation, should be permitted as such a debt is not subject to the moratorium granted to the tenant (there is no clear cut view on this issue).

For debts that are subject to the moratorium, the question is more difficult and there is no clear cut answer but, it is most likely that the landlord could not evict the tenant, especially if the building is the place where the tenant carries on his commercial activities.