Bankruptcy clause in lease

[Slingerland]

Good morning! I have a question, and if it permissible I would like to post it here before calling my local attorney.

As I've discussed in past posts, I own rental homes. I'm keeping them, they cash flow profitably. (My debt issues were caused by medical bills and pay cuts.) Most landlords in my area will NOT consider people in bankruptcy, but with the help of several angels here, I've worked out procedures to work with people in bankruptcies and rent to them. The procedures have been VERY successful!

It's good to make a profit and help people out!

But my question: my leases start as an initial one-year fixed term, then become month-to-month automatically. This is the same as Arkansas law, but I like to state it in the lease as well. But in regards to bankruptcy, I have a clause in my lease that if a tenant files bankruptcy, the lease immediately changes to month-to-month. Here is the actual clause:

g) Bankruptcy of Tenant. If Resident(s) declare bankruptcy during the Initial Term of this lease, this lease shall immediately convert to Month-to-Month tenancy. Resident(s) may remain in Premises so long as rent continues to be paid in full and on time and all other terms of this Lease are followed. Landlord may terminate the new Month-to-Month tenancy with notice as required under law in which case Resident(s) agree to vacate Premises.

The clause does not terminate the lease, nor does it require the tenant to move out. It simply makes the lease month-to-month. If they do not pay, I can terminate with notice. If they cannot afford to stay (example, trustee says the house is too expensive for a C-13 plan) they can give notice and move out.

So my question to the bankruptcy attorneys and gurus... does this clause violate the federal bankruptcy laws?

Thanks, everybody!!!

[justbroke]

A month-to-month tenancy is self-terminating and self-reinstating as far as I know. This is why month-to-month tenancies (caused by self-executing lease agreements) are considered to be expired in bankruptcy. It would expire every single month. Now the tenant should file a Motion to Assume Lease in a bankruptcy if they want the lease to remain in force. Otherwise, a lease is automatically rejected by a bankruptcy within (guessing the days here) 45 days of filling.

I was a landlord at a time and had multiple tenants myself. I don't think that clause affects anything since bankruptcy law would overrule that clause anyhow.

Personally, as a landlord, I would seek to understand my tenant's intent immediately upon notice that they filed. If they are paying and have regularly paid on time, then you just leave them alone. If they stop paying, you start eviction process based on your State or municipalities laws and rules. I like that paragraph and read it more as a notice since ipso-facto bankruptcy clauses are void. So, since it would be void anyhow, I think of it as a nice way to provide notice to your tenants that you are going to be "nice" if they pay regularly.

11 U.S.C. §541(c)(B) that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a case under this title, or on the appointment of or taking possession by a trustee in a case under this title or a custodian before such commencement, and that effects or gives an option to effect a forfeiture, modification, or termination of the debtor’s interest in property.

It goes without saying, that you should have any non-standard lease which you have drafted yourself reviewed by a real-estate attorney to make sure it complies with local regulations and doesn't expose you.

[Slingerland]

Thanks, justbroke! I didn't know that MTMs were considered expired, but it makes sense, especially if the TT says the rent is too high for a C-13 payment plan. My concern was that the conversion from fixed year term to MTM would be a violation of some kind.

As far as renting to people in bankruptcy, two of my tenants are in C-13 payment plans now, and a third had a successful C-7 discharge before renting from me. They're my best tenants! Most landlords here won't rent to them, so when they find places like mine (good shape, well taken care of!) they're putting down roots and staying. They pay 100% on time, and haven't caused any problems... probably because they would be concerned about finding a new place to rent!

It seems that I've found a good market niche.

Thanks again!