Can Chapter 7 Trustee Break a Lease?

[Vandervecken]

A quick question... my 341 continuance is coming up on Tuesday, and the trustee is interested in potential equity in a rental house I own. (I own two, one is seriously upside down, one has some equity.)

If he claims there is nonexempt equity in it, our response will be the costs in selling the property will be high, so the net to the trustee will be very low. Right now, the rental house is currently occupied by a man with 20 months left on a two year lease. In this market, the house will not sell with a tenant in place, except to another investor. And the investors here are smart and will only pay a fraction of the retail price of the house. In a normal sale, the lease follows the property and the new owner would have to continue to rent the house.

My question for the weekend: if the trustee decides he wants to sell the house, does the law allow him to void the tenant's lease and kick them out?

Thanks!

[justbroke]

If he claims there is nonexempt equity in it, our response will be the costs in selling the property will be high, so the net to the trustee will be very low.

The Trustee doesn't care about the "net" being low. The Trustee will want you to negotiate on the equity in the home and you'll have to come up with a reasonable number. If you are trying to keep the property, then you'd negotiate the equity number (30%, 40%, 50% of the equity?). That's a number you'll have to determine. In the case of negotiating you can then "consider" some of the costs to sell the property in that number. The key is making it "easy" for the Trustee so they don't get the hassle of dealing with a sale.

Right now, the rental house is currently occupied by a man with 20 months left on a two year lease. In this market, the house will not sell with a tenant in place, except to another investor. And the investors here are smart and will only pay a fraction of the retail price of the house. In a normal sale, the lease follows the property and the new owner would have to continue to rent the house.

My question for the weekend: if the trustee decides he wants to sell the house, does the law allow him to void the tenant's lease and kick them out?

The Trustee can reject any lease. Whether the Trustee would do that is too fluid. If the place has a positive cash flow, the Trustee could assume the lease and operate the property for some time, then sell it later. Some Trustees are crafty and may even seek a carve-out from the sale (negotiated with the lender), although carve-outs are typically done for underwater properties.

The bottom line is this. If the Trustee is so interested, some one (you or the Trustee) will need to have a full appraisal performed to determine the true market value. You both need to find out what the exact value is to determine the true equity value. Only then can you start to formulate a method to deal with that equity. If it's a really low number the Trustee will still want a "piece" of it. If it's negative, then the Trustee should quickly abandon his/her interest in that property.

Edited to add: I just found this. It's an interesting read on the topic of the Trustee rejecting an unexpired residential lease. https://business-finance-restructuri...-the-landlord/

[Vandervecken]

The Trustee doesn't care about the "net" being low. The Trustee will want you to negotiate on the equity in the home and you'll have to come up with a reasonable number. If you are trying to keep the property, then you'd negotiate the equity number (30%, 40%, 50% of the equity?). That's a number you'll have to determine. In the case of negotiating you can then "consider" some of the costs to sell the property in that number. The key is making it "easy" for the Trustee so they don't get the hassle of dealing with a sale.

Thanks, JB! This is the direction my attorney is going with it.

We declared the ownership of the LLC as an asset, not the individual houses. The trustee would have to move to take over operating the LLC, which we hoped would cause him to abandon the interest. So my question was to see whether the trustee would be saddled with running the LLC for several years, thereby lessening his interest in the properties. I actually have sufficient funding to use a 401(k) loan and buy 100% of the equity back, but of course I would prefer a lower amount .

The trustee did a continuation of my 341 last month, and the follow-up is Tuesday. Hopefully by the end of the week we'll have a settlement amount. And if I have to buy back the equity, we'll make sure the student loans have a claim. My student loans are half the unsecured balance, so (at least) half the buyback will go to pay down non-dischargable debt!

[justbroke]

It sounds like you have a plan. I would hate to be the Trustee but some Trustees like to dabble in these areas. If it's akin to disregarded LLC (only you and your debtor spouse are members), the Trustee steps in your shoes and attempts to sell that property. I'm sure some Trustees wouldn't mind dabbling in the unpredictable, but most would like for you to make an offer (at least that's my thought). I have owned property but not through an LLC (I had in fact created an LLC with an S-Corp election) but never moved the property into the LLC (fear of mortgagee issues).

In any case, we all (here at BKforum) wouldn't mind finding out the outcome of the dance with the trustee. Keep us updated!

[Vandervecken]

In my case, the ex-wife is still on the mortgages for the rental houses and the divorce settlement requires me to continue to operate the houses until I can either sell or refinance them at no loss to her. Otherwise I would have been tempted to turn over the upside-down house to the trustee. But at least it cash-flows positive... not a lot but positive. The house the trustee is in cash flows much better.

But like you say, if the trustee is not going to abandon his interest, best to find a figure and buy back the interest. I guess I'm just having a case of nerves, since the continuation is in three days. I was hoping to have this done by now (sigh.)