What Happens to Unexpired Leases in Bankruptcy?

As the number of brick and mortar retailer bankruptcy filings increases, landlords are often placed in a position with little control over the fate of their real property leases with the bankrupt retailer. The bankruptcy code gives a debtor the ability to assume or reject unexpired leases. Assumption means the debtor will continue to perform under the terms of the lease, while rejection means that the lease will end effective the date of rejection.

Debtors generally have wide latitude in choosing which leases to assume and reject. Generally, Debtors will assume the leases for stores or locations where business operations are profitable, and reject those that do not contribute to a debtor’s profitability. Assumption and rejection is done by filing a motion with the bankruptcy court with notice to the lessor and all affected parties. Affected parties are able to object to the rejection or assumption of a lease and present argument and evidence to a bankruptcy court.

If a debtor elects to assume a lease, it must pay the landlord for all delinquent amounts owed and “cure” any other lease defaults prior to assumption. When a debtor elects to reject a lease, the lessor is entitled to a claim for damages in the amount provided for in the bankruptcy code. This damage claim is afforded general unsecured priority.

Lease rejection can be a benefit for the lessor looking to get out of a lease. Once a lease is rejected, the lessor is free to find a new tenant or use the premises at his discretion. Some lessors are entitled to recover rent that is due after the bankruptcy is filed but before the lease is rejected. Bankruptcy courts in different jurisdiction apply different tests for calculating and awarding this type of rent. These claims are paid in full; therefore, it is important for lessors to understand their rights with respect to these claims.

Allen M. DeBard

Allen is a shareholder in Langley & Banack’s bankruptcy and workouts section. In all representations, Allen focuses on the details of each case and the client’s goals. This allows him to map out a course for the case and anticipate potential issues before they arise. This detailed analysi...