Changes Proposed to Landlord's Rights in Bankruptcy - International Law Office

Background
Changes
Comment

Background

The Swedish government has proposed new changes to the Preferential Rights of Creditors Act, some of which will have an impact on landlords. At present, in the case of a tenant's bankruptcy, the landlord enjoys a preferential right for rent claims to an amount equal to three months' rent. If the landlord does not give notice of termination of the rental contract, the bankruptcy estate may continue to use the premises without being responsible for paying rent.

Changes

Landlords currently have preferential rights for rent claims equal to three months' rent. It is proposed that this preferential right be abolished and that such claims be treated as ordinary debts in bankruptcy.

There are also proposed changes with regard to termination of the rental contract and liability of the bankruptcy estate, which require the receiver to be more active with regard to the rental contract.

Under existing law, the validity of a rental contract does not automatically cease upon the tenant's bankruptcy. The bankruptcy estate, represented by the receiver, may give notice to terminate the contract. However, the estate must still pay rent during the term of notice - otherwise the contract may be repudiated. The landlord, on the other hand, may give notice to terminate the contract if it does not have sufficient collateral or is not provided with such collateral within one month of the bankruptcy, or if the bankruptcy estate does not agree to accept liability for the landlord's claims against the tenant.

Under Swedish case law the estate is not liable for the debtor's obligations under the rental contract if it has not declared itself willing to accept liability for those obligations. This means that even if the estate continues to use the premises, the estate may not be liable for the rent or other obligations. The landlord's claims for rent are treated as a claim without any preferential right. This is a negative situation both for competitors to the estate and for the landlord.

Under the proposal, the landlord may in future ask the receiver whether the estate wishes to enter into the rental contract or leave the premises. The proposal suggests that within one month of receiving this inquiry, the estate will become liable for rent due as of the declaration of bankruptcy if it fails to place the premises at the landlord's disposal.

This means that the receiver cannot remain passive and thus carry on the business in the premises without the risk of becoming liable for rent. On the other hand, the landlord is still obliged to keep itself informed of its tenants' financial situation and of potential bankruptcies.

For the receiver, the proposed rules will create a need to make some business-oriented assumptions about the rental contract. If the receiver believes that it is possible to sell the business, and thus decides to carry on the business while seeking out potential buyers, it has one month to decide whether the business will be sold together with the rental contract. Another possibility is to sell the rental contract by itself, without the business. If the receiver believes that it will be able to sell the contract for an amount that exceeds the landlord's claimed rent as from the date of the bankruptcy, it is advisable to enter into the contract. On the other hand, if the receiver is merely seeking to discharge the bankruptcy as soon as possible, it must notify the landlord that the estate is not interested in entering into the contract and leave the premises within the given timeframe, in order to avoid assuming liability for rent.

Comment

The proposed changes to the act are scheduled to enter into force on January 1 2004. Parliament is due to vote on the proposal in May, although it is uncertain whether this timetable will hold. Several political parties and creditor representatives have severely criticized the proposal. It is thus uncertain whether the proposal will be approved by Parliament.

For further information on this topic please contact Johan Hessius or Magnus G Graner at Advokatfirman Lindahl by telephone (+46 8 670 58 00) or by fax (+46 8 667 73 80) or by email (johan.hessius@lindahl.se or magnus.graner@lindahl.se).