The day your master lease tenant files bankruptcy, property, you’re managing a court-supervised financial crisis. Your tenant owes you money, yet the automatic stay blocks collection. They’re occupying your property but you can’t evict them. Meanwhile, they’ve got months to decide whether they’re keeping or rejecting your lease while you wait. Here’s how the assumption and rejection process actually works, what the statutory caps mean for your potential recovery, and why property owners are rethinking master lease structures as commercial bankruptcy filings climb in 2026.
TLDR:
- Tenant bankruptcy triggers automatic stay, blocking eviction and rent collection actions immediately
- Your recovery caps at one year’s rent or 15% of remaining term (max 3 years) if tenant rejects lease
- Letters of credit offer better protection than security deposits during bankruptcy proceedings
- Post-petition rent qualifies as priority administrative expense, giving you stronger recovery rights
- AvantStay’s institutional-grade management eliminates single-tenant bankruptcy risk through diversified revenue streams
Understanding the Automatic Stay and Its Impact on Your Rights
When a commercial tenant files for bankruptcy, most collection actions come to an immediate halt. The automatic stay under Section 362 of the Bankruptcy Code takes effect the moment the petition is filed, barring landlords from demanding past-due rent, initiating eviction proceedings, or applying security deposits without court approval.
The stay is designed to give the tenant temporary relief while the court evaluates creditor claims and determines how the lease will be treated. Even if rent has been unpaid for months, landlords cannot act independently. The stay remains in place until the case is closed, the court grants relief, or the lease is formally assumed or rejected. Violating the automatic stay can result in sanctions, making prompt consultation with bankruptcy counsel essential.
Assumption vs. Rejection: What Your Tenant Will Decide
A tenant in bankruptcy has a limited period to determine the lease’s outcome. In a Chapter 11 case, the debtor generally has 120 days from the petition date to assume or reject the master lease, subject to court-approved extensions.
If the lease is assumed, the tenant must cure all defaults, pay outstanding rent, and continue performing under the original terms. Rejection treats the lease as breached, requiring the tenant to surrender the premises and leaving the landlord with a claim for damages as an unsecured creditor. A third alternative, assumption and assignment, allows the tenant to transfer the lease to a qualified third party that satisfies the lease’s original financial and operational requirements.
Each option carries distinct implications for cash flow, timing, and control of the property.
Lease Option | Landlord Impact | Timing | Financial Recovery |
|---|---|---|---|
Assumption | Lease continues on original terms; tenant must cure all defaults and pay back rent in full | Decision required within 120 days (subject to extensions) | Full recovery of pre-petition arrears plus ongoing rent payments at contract rate |
Rejection | Lease terminates; landlord regains possession after tenant vacates property | Decision required within 120 days (subject to extensions) | Capped at greater of one year’s rent or 15% of remaining term (maximum 3 years); filed as unsecured claim with minimal recovery |
Assumption and Assignment | Lease transfers to qualified third party; original terms remain intact | Decision required within 120 days; assignment requires court approval | Full cure of defaults by assignee; landlord receives adequate assurance of future performance from new tenant |
Post-Petition Rent Obligations During Bankruptcy
The filing date creates a clear split. Rent that accrued before the petition date is handled through the claims process, while rent that comes due after filing must be paid in full as long as the tenant remains in possession of the space.
A commercial tenant is obligated to pay current rent until the lease is formally rejected. These post-petition obligations are treated as administrative expenses, giving them priority over general unsecured claims if the tenant fails to pay.
If the tenant stops paying rent after filing but before rejecting the lease, the landlord may seek relief from the automatic stay or file an administrative expense claim. While these remedies carry greater priority than pre-petition claims, recovery still depends on court approval and available estate assets.
Careful tracking of rent accruals and payment dates during this period can significantly strengthen an administrative expense claim.
Security Deposits vs. Letters of Credit in Bankruptcy
The type of security you hold when your commercial tenant files bankruptcy matters. Security deposits become part of the bankruptcy estate, subject to claim caps and requiring court approval before you can apply them against damages.
Letters of credit offer better protection. Most bankruptcy courts treat them as outside the estate, letting you draw on them without court approval or cap restrictions. When your tenant files Chapter 11, you can typically access the full amount to cover unpaid rent and damages.
For master lease structures involving substantial properties, requiring a letter of credit instead of a cash deposit gives you faster access to funds and higher recovery potential during tenant bankruptcy.
Filing Your Claim in Bankruptcy Court
You’ll file claims in two categories when your commercial tenant enters bankruptcy. First, submit a proof of claim for pre-petition damages within the court-mandated deadline, typically 70 days after filing. Calculate rejection damages using the statutory cap: the greater of one year’s rent or 15% of remaining lease value up to three years.
Second, file administrative expense claims separately for post-petition rent that went unpaid while your tenant occupied the property before lease rejection. These claims receive higher priority and aren’t subject to damage caps. Missing either deadline can forfeit your recovery rights.
Special Considerations for Master Lease Structures
Master lease arrangements add complexity beyond typical commercial leases. When you lease your property to a master tenant who subleases to end users, their bankruptcy creates unique exposure beyond standard landlord-tenant relationships.
Courts sometimes recharacterize master leases as guaranty agreements rather than true leases, especially when the master tenant operates more like a property manager. This reclassification strips away lease-specific protections and treats you as an unsecured creditor with weaker recovery rights.
Your master tenant collects rent from subtenants during bankruptcy but may not pass it through to you while the automatic stay blocks your collection efforts. You’re watching rental income flow to a bankrupt entity with no guarantee you’ll receive it, and courts must approve any payments to you.
The Rising Bankruptcy Risk Environment in 2025-2026
The bankruptcy environment facing property owners has grown more challenging. Commercial filings rose 5 percent to 31,810 in 2025 from 30,201 in 2024, signaling heightened distress across tenant categories.
Property owners entering master lease arrangements in 2026 face elevated risk that tenants who appear financially solid today could face distress within 12 to 24 months. You need protective measures in place before signing. Requesting letters of credit rather than security deposits, shorter assumption windows, and stronger financial covenants becomes critical when tenant bankruptcy probability is rising across the market.
How AvantStay’s Institutional-Grade Management Protects Property Owners
AvantStay’s vertically integrated management model offers property owners an alternative to master lease arrangements that concentrate bankruptcy risk with a single commercial tenant. When you partner with us, you maintain direct ownership while we handle operations through institutional-grade systems.
Our approach diversifies revenue risk across hundreds of individual short-term bookings rather than depending on one tenant’s financial health, helping property owners maintain strong occupancy even during challenging market conditions. The Lighthouse portal gives you real-time visibility into occupancy, revenue, and property performance, while our proprietary revenue management algorithm optimizes pricing.
With over $5 billion in assets under management and exclusive access to Marriott Bonvoy’s 140 million members, we provide distribution strength and operational accountability that traditional master lease structures can’t match.
Final Thoughts on Master Lease Bankruptcy Exposure
When your master lease tenant goes bankrupt, you’re watching rental income flow through a distressed entity while automatic stays block your collection rights and damage caps limit recovery. Smart property owners in this environment choose protective structures upfront, from requiring letters of credit to partnering with operators who distribute revenue risk across hundreds of individual bookings rather than one tenant’s solvency. You can’t control bankruptcy filings, but you can control how much exposure you accept when structuring your rental agreements. Better decisions at signing mean better outcomes during distress.
FAQ
What happens to rental income if my master lease tenant files bankruptcy but hasn’t rejected the lease yet?
Your tenant must continue paying post-petition rent as an administrative expense until they formally reject the lease, giving you priority collection rights over general unsecured creditors if they default during this period.
How long does my commercial tenant have to decide whether to keep or reject the lease in Chapter 11?
Your tenant typically has 120 days from the bankruptcy filing date to assume or reject your master lease, though courts often grant extensions that can prolong your uncertainty for months.
Can I access my tenant’s security deposit immediately when they file bankruptcy?
No, security deposits become part of the bankruptcy estate and require court approval before you can apply them, but letters of credit typically remain outside the estate and can be drawn without court permission or damage caps.
What’s the maximum I can recover if my commercial tenant rejects a long-term master lease?
Rejection damages are capped at the greater of one year’s rent or 15% of the remaining lease term up to three years, meaning you’ll recover far less than the full contract value as an unsecured creditor.
Why are master lease structures riskier than direct property management during bankruptcy?
Master leases concentrate all revenue risk with a single tenant whose bankruptcy blocks your access to rental income, and courts may reclassify the arrangement as a guaranty rather than a lease, stripping away your landlord protections.
