Personal Property Lease Termination

When personal property is the subject of a Lease Agreement (“Lease”), the Lessor (or owner of the property) should initially look to the default provisions and consider terminating and/or accelerating the Lease payments at the initial stages of attempting a work out with a delinquent Lessee. This is true for two reasons: (1) after putting pressure on the Debtor, he may file a bankruptcy and the owner of the personal property will then be dealing with the “assumption or rejection” provisions of the Bankruptcy Code, and/or (2) when the Lessor attempts to repossess the property, prior to terminating the Lease, the Debtor may seek the intervention of a State Court judge by obtaining a Temporary Restraining Order or other injunctive relief. Either of these two scenarios can be expensive and will delay relief to the Lessor.

The Lessor should carefully consider its initial options and review the Lease documentation prior to the making of threats or the sending of threatening letters to a distressed Debtor that might trigger one of these two options to try to hang on to the property. This is especially true for highly valuable personal property (for example - construction equipment and/or modular buildings, etc) which may be integral to a Lessee’s business. The Creditor’s communications with the Debtor should not simply be viewed as an attempt to get them to pay, but rather a complex game of chess where the Creditor is setting up the next move.

Depending upon the documentation in the Lease, the Lessor may be able to utilize one (or all) of the following options (and perhaps others): (1) demanding payment, (2) giving notice of intention to accelerate the indebtedness, (3) accelerating the indebtedness, (4) demanding the return of the property, (5) demanding the right to inspect the property at a given time and place, and/or (6) terminating the Lease. Consideration should be given as to whether the Debtor is complying with the terms of the Lease or other documentation under the Lease, including requirements to maintain insurance, not damage the property, remain solvent, provide financial statements, or avoid actions which might result in the Lessor deeming itself insecure. The Lease documentation is important for determining what constitutes an “event of default” for these purposes. By doing so, the Lessor may be able to document a default that has occurred before an imminent Bankruptcy filing.

Before the sending of any of these types of notices or upon hearing that a bankruptcy is a possibility, the Lessor will want to consider all of these matters and, only then, communicate with the Debtor anticipating the Debtor’s next move. If the Creditor makes the wrong move, it may be stuck with the Lessee being able to keep the collateral for extended periods after an injunction, Automatic Stay, or potential acceptance under the Bankruptcy Code.

In the Bankruptcy context, the Debtor (or Debtor-in-Possession, or Trustee) has extensive powers, options, and, importantly, additional time to exercise the options. See 11 U.S.C. § 365. If the Lease (or Executory Contract) has not yet expired, been cancelled or terminated, then the Trustee (subject potentially to Court approval and some exceptions) may be able to assume or reject the contract on behalf of the Debtor. The Trustee may even be able to assume and assign the contract. Documenting the prior default becomes especially important in dealing with the Trustee, because when the Debtor is in default, the Trustee may be required to cure, compensate (or provide adequate assurances of such) prior to being able to exercise acceptance or assumption remedies. As a result, and significantly, if the Lessee is able to terminate and cancel the Lease, then the Lease may no longer be considered executory or unexpired, may not be “Property of the Bankruptcy Estate,” and, therefore, the Debtor (and Trustee) will have reduced rights with respect to the leased property. The Creditor may still have to file a Motion to Lift the Automatic Stay under Section 362 of the Bankruptcy Code, but obtaining this relief will likely be much easier with the defaults documents and/or the Lease terminated.

(Post by Erik Cary)