Pre-petition, Post-Petition, & “Stub” Rent in North Carolina

Once a tenant files for bankruptcy, a lease becomes subject to the rules of bankruptcy, the tenant becomes largely untouchable, and you “get in line” according to your priority as a creditor. Bankruptcy triggers certain legal rights and obligations not included in the lease itself that a landlord must navigate to minimize loss.

In bankruptcy, the tenant’s debts, including rent, are divided into pre- and post-petition debts, that is, rent that accrues before the bankruptcy case is filed and rent that accrues after the case is filed. Under the “automatic stay,” which goes into effect as soon as a bankruptcy case is filed, any action to collect pre-petition debt, such as pre-bankruptcy rent, is prohibited. So too is the landlord’s ability to evict the tenant or apply (i.e. “setoff”) the tenant’s security deposit against the past due rent. The landlord should file a claim in the bankruptcy for the amount owed for pre-petition rent.

Post–petition rent may be moved from the “back-of-the-line” to a higher priority as an “administrative expense” (often one of the highest payment priorities in a bankruptcy case). A landlord must file a motion with the bankruptcy court showing that the occupancy of the leased premises provides an actual and necessary benefit to the estate – meaning it is useful in helping the tenant pay its bills.  If approved as an administrative expense, the tenant must continue to pay rent as usual.  Otherwise, the tenant can be evicted, though the landlord should consult bankruptcy counsel on the process for doing so.

Having addressed pre-petition rent and post-petition rent, what about rent that arises between the petition date and the first post-petition rent payment due under the lease? This is called “stub rent.” For example, suppose rent is due on the 20^th day of each month.  The tenant files bankruptcy on the 5^th.  Is the rent that accrues from the 6^th to the 20^th (for which payment was due before the bankruptcy case was filed) considered pre-petition rent or a post-petition administrative expense? 

Courts use one of two approaches to determine whether stub rent is treated as pre-petition or post-petition priority debt. The first is the “Proration” or “Accrual” approach, in which the tenant must pay stub rent as priority post-petition rent. The second is the “Billing Date” approach, where the tenant is only required to pay those obligations that become due and payable on or after the petition date, leaving the stub rent to be treated as an ordinary pre-petition claim.

The stub rent debate has not been definitively settled by the Bankruptcy Courts in any of the Eastern, Middle or Western Districts of North Carolina. While the Fourth Circuit Court of Appeals has not ruled on the matter to date, one of North Carolina’s Fourth Circuit sister courts—the Bankruptcy Court for the Eastern District of Virginia—applied the proration approach. See In re Circuit City Stores, Inc., 447 B.R. 475 (Bankr. E.D.Va. 2009). As such, there is a reasonable likelihood that the Bankruptcy Courts in North Carolina would follow the proration/accrual approach and treat stub rent as an administrative expense, giving it priority over many other claims.

In conclusion, the landlord of a bankrupt tenant in North Carolina must file a claim for pre-petition rent to be paid; can generally collect post-petition rent if the tenant remains in the property; and  may be able to enforce stub rent as a high priority administrative claim.

David Mills, a Board-Certified Specialist in Business Bankruptcy Law, can assist you in protecting your interests.