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BANKRUPTCY IN REAL ESTATE
Bankruptcy can affect almost every aspect and field of life leaving no exception to the real estate sector and the persons involved in this field. Bankruptcy in real estate affects the status of the tenant, landlord, and the status of the mortgagor and the mortgagee, etc.
Bankruptcy in real estate does not occur all of a sudden and signs like delaying the fulfillment of financial obligations, unexpected slowdown in the rental of space, delaying the sale of property solely built for the sale purposes, the filing of statutory mechanics’ liens by the by contractors or material suppliers are some signs, at least for the prudent eye, that indicates that the financial disaster is about to happen in the real estate sector.
BANKRUPTCY IN REAL ESTATE CONCERNING DIFFERENT SCENARIOS (WITH RELEVANT LEGAL PROVISIONS)
Section 362 of subchapter IV of chapter iii of Title 11 of the US code states that filing of the petition alone is sufficient for staying all the acts, proceedings, activities and judicial process against the debtor or the person declared bankrupt or property of the estate or the debtor. The scope of the stay is so vast that it covers the prevention of claim, the enforcement of a security interest, or initiating any other step which could render the loss of interest of the debtor in property that may or may not belong to the debtor and the debtor may be merely in the possession of the property.
If the tenant becomes bankrupt then it depends on the lease contract as to what does it say about such a condition. Mostly, in America, it is written in the lease contract that the lease shall be terminated automatically on the bankruptcy of the tenant, and in some cases, the same right may be vested with the landlord. Section 365 (h) of subchapter IV of chapter iii of Title 11 of the US code explains the events when the landlord may become bankrupt too.
BANKRUPTCY IN REAL ESTATE AND COVID 19
The covid-19 calamity had a huge effect on the real estate market. Health concerns and orders confined to home have resulted in fewer home buyers. Similarly, fewer sellers are willing to put their properties up for sale or allow strangers into their homes during the pandemic. Despite the sharp drop in early spring, home sales rebounded during the summer. At the same time, the health crisis had wreaked economic havoc in the form of job loss and employment uncertainty. Fears of the 2007-09 housing crisis persist in the minds of many as some homeowners have previously struggled to pay off their mortgages and the unemployment rate remains at an all-time high. Due to the pandemic, many families are reconsidering their housing needs as their homes have replaced offices, schools, restaurants, and recreational facilities. Although Bankruptcies have no DIRECT negative impact on the economy. Whenever insolvency is registered, it indicates the harm already has happened. Increased bankruptcies have become more of an indicator than a source of economic deterioration. Amid the pandemic, many small businesses had to lay off staff and terminate their operations due to many challenges and had to file for bankruptcy. Such small ventures and businesses owe quite a lot of money to their supply chain entities. Because the worth of commercial and retail premises has collapsed as a result of the epidemic, infrastructure projects have gone underwater, indicating the properties’ worth are less than what the proprietors owe. And this is the reason many companies filed for bankruptcy when the need for an office workplace diminished in the wake of remote working.
Conclusion
Bankruptcy was hardly a concern of real estate lawyers but now it is the prime duty of real estate lawyers to think and anticipate the unthinkable and attempt to avoid its consequences or at least convey the concerns to their clients and let them know what’s best in their interest, as the bankruptcy law greatly impacts the rights of investors, lenders, and user of real property. As with so many other things, whether we like it or not, we will have to learn to understand it and to live with it.
To learn more about the effects of Covid-19 on real estate markets, please click here.
Learn more about Bankruptcy in real estate here.