U.S. bankruptcy law has come under fire as the number of bankruptcy filings has increased more than 80 percent this decade. And if reforms recently passed by the House receive approval from the Senate, landlords stand to benefit considerably when their tenants seek bankruptcy protection.

Earlier this month, the House passed the Bankruptcy Reform Act of 1999 (HR 833) by the wide margin of 313-108. Most of the bill’s provisions are related to consumer bankruptcy, but key commercial provisions are garnering the support of groups like the International Council of Shopping Centers.

HR 833 would require tenants in bankruptcy to assume or reject leases within 120 days. An additional 120 days could be granted by the court for cause, but time beyond that would require the landlord’s agreement.

Future rents also would be treated as "administrative priority" for one year when a tenant assumes and then fails to fulfill its lease. The measure also would allow shopping center owners and other landlords greater accessibility to creditor committees.

The bill’s companion legislation, S 625, is expected to come up for debate and vote in the Senate in late May, with a conference committee convening in early June.

The legislation first arose because of the increasing number of financially healthy companies filing for bankruptcy as a tool to break leases and other payment agreements. Under current law, a business does not have to be insolvent to declare bankruptcy.

Last year, both houses of Congress passed consumer and business bankruptcy reform legislation. After a veto threat, the House and Senate went into negotiations to make changes to the bill. The amended legislation was passed by the House, but the Senate did not address the measure before Congress was adjourned for the year.

So now that an almost identical bill again appears to have the support of both chambers, President Clinton is inking up his veto pen. The Clinton Administration is unhappy with the bill’s consumer provisions, while the corporate side has gained little attention.

In an attempt to appease Democrats, the House considered a substitute bankruptcy bill that was stricter toward lenders. This legislation included such ground-breaking provisions as requiring credit card companies to disclose on monthly statements how long it takes to pay off balances at the minimum payment level. (I think most of us own calculators in this country, thank you.) This substitute bill failed.

According to Rep. J.C. Watts, R-Okla., HR 833 is intended to prevent the "gaming" of the bankruptcy system (e.g. running up credit card bills right before filing for bankruptcy and dismissing a bankruptcy case as a stall tactic). Under the proposed law, both individuals and businesses would be required to submit repayment plans in cases where they currently would dismiss their debts.

Currently, the House has enough votes to override the threatened veto.

Published: May 18, 1999

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Lesley Hensell covers commercial real estate and financial issues for Realty Times. Based outside of Dallas, Lesley works with high-tech and real estate clients as an independent marketing and public relations consultant. She also writes for several publications, including the Dallas Morning News. E-mail Lesley at: lhensell@earthlink.net