Retention and Bankruptcy – The Fate of the Landlord’s Pledge When the Tenant Becomes Insolvent

In practice, landlords regularly encounter situations where tenants fail to fulfill their rent payment obligations. The legal consequences are multifaceted and become particularly complex when bankruptcy is opened over the tenant. The following article examines the legal foundations of the landlord’s retention right and its treatment in bankruptcy proceedings.

The Landlord’s Retention Right as a Statutory Security Measure

The retention right of commercial space landlords is governed by Art. 268 para. 1 CO and grants the landlord a pledge right over movable objects located in the rented premises that belong to the furnishing or use of said premises. Secured thereby are a year’s rent in arrears as well as the current half-year’s rent. This statutory security measure is available to the landlord by law and requires no special agreement between the parties.

The enforcement law classification of the retention right is of decisive importance for its treatment in bankruptcy. Art. 37 para. 2 DEBA determines that the term “chattel pledge” also encompasses the retention right. This classification has far-reaching consequences, as it integrates the retention right into the system of pledge rights and makes the corresponding provisions of the Debt Enforcement and Bankruptcy Law applicable. The retention right is thus treated as a chattel pledge under enforcement law, even though it constitutes a statutory right of retention under substantive law. This fundamental rule has far-reaching consequences for the debt enforcement on pledge liquidation initiated by the landlord to enforce the retention right.

The law, however, provides for an important exception: debt enforcement proceedings on the liquidation of pledges that have been established by third parties are not terminated upon the opening of bankruptcy. The question that now arises is whether the landlord’s retention right constitutes such a “pledge established by a third party.” The Federal Supreme Court clearly answered this question in BGE 124 III 215: No, the landlord’s retention right is an independent right of the landlord and not a pledge established by a third party.

The landlord’s retention right arises by law and is based on the lease relationship between landlord and tenant. It is not a pledge that a third party would have established in favor of the landlord. The exception of Art. 206 para. 1 DEBA therefore does not apply. The consequence: The debt enforcement on pledge liquidation initiated by the landlord is terminated upon the opening of bankruptcy.

Fate of Retained Objects in the Bankruptcy Estate

With the termination of the debt enforcement proceedings, the question arises regarding the fate of the already retained objects. Art. 199 para. 1 DEBA regulates this case: Seized assets whose liquidation has not yet taken place at the time of the opening of bankruptcy fall into the bankruptcy estate. This provision also applies to objects retained within the framework of a retention.

The retained objects thus enter the bankruptcy estate. This means that liquidation no longer takes place through the debt enforcement office within the framework of debt enforcement on pledge liquidation, but rather through the bankruptcy administration in the bankruptcy proceedings. The bankruptcy administration must liquidate the objects and distribute the proceeds according to statutory provisions.

The Landlord’s Legal Position in Bankruptcy Proceedings

Despite the termination of the debt enforcement proceedings and the transfer of the objects into the bankruptcy estate, the landlord does not lose his rights. His legal position in bankruptcy proceedings is particularly protected by the existing retention right. The retention right is treated as a chattel pledge under enforcement law pursuant to Art. 37 para. 2 DEBA. This classification has decisive consequences for the collocation of the landlord’s claim in bankruptcy.

The landlord must file his claim in bankruptcy. This filing is indispensable, as only filed claims are considered in bankruptcy proceedings. In collocation, the landlord’s claim is classified as a pledge-secured claim. Art. 219 para. 1 DEBA determines that pledge-secured claims are paid preferentially from the proceeds of the liquidation of the pledges. This means that the landlord is satisfied preferentially from the proceeds of the liquidation of the retained objects.

The preferential satisfaction from the pledge liquidation proceeds is a significant advantage over unsecured creditors. In many cases, this means that the landlord recovers his claim in full or at least to a significantly higher percentage than unsecured creditors.

Practical Consequences and Recommendations

For landlords, the timely and correct filing of claims in bankruptcy is of decisive importance. Only through timely filing is it ensured that the claim is collocated as a pledge-secured claim. Another important aspect concerns the assertion of the retention right. Recording a retention inventory by the debt enforcement office creates a reliable basis for subsequent assertion in bankruptcy proceedings.

Conclusion

In summary, it can be stated that the landlord’s retention right also takes effect in the tenant’s bankruptcy. Although the opening of bankruptcy leads to the termination of debt enforcement on pledge liquidation, as the retention right is not a pledge established by a third party. The retained objects fall into the bankruptcy estate and are liquidated by the bankruptcy administration. The landlord, however, does not lose his security: His claim is collocated as a pledge-secured claim and he is satisfied preferentially from the pledge liquidation proceeds.

This legal situation creates a balanced balance of interests between the landlord’s need for security and the interests of bankruptcy creditors. The legislature has created a system with the regulation in Art. 206 DEBA and the special regulation for pledge-secured claims in Art. 219 DEBA that both protects creditor interests and enables an orderly conduct of bankruptcy proceedings.

For practice, this means that landlords are not defenseless even in bankruptcy cases. The retention right provides effective security that finds its continuation in bankruptcy proceedings through preferential collocation. The prerequisite, however, is that the claim is filed in a timely manner and the retention right is exercised correctly.

For further questions regarding retention rights, bankruptcy liquidation, or other tenancy law topics, we are at your disposal. We advise you comprehensively and support you in enforcing your rights.