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| Landlords, Tenants,
and the REAL PROPERTY LEASES A debtor in bankruptcy can assume or reject certain contracts, including unexpired leases of real property. 11 U.S.C. §365. Under the current law, a debtor must assume or reject leases of nonresidential real property within 60 days after the debtor files bankruptcy. 11 U.S.C. §365(d)(4). In cases involving multiple leases, however, bankruptcy courts regularly extend the 60-day deadline. As a result, a landlord may wait months or even years before knowing whether the debtor is going to assume or reject its lease. The new act provides both a burden and a benefit to
landlords by: (1) extending the deadline for debtors to assume or
reject unexpired nonresidential leases; and (2) capping the length
of extensions that may be added to that deadline. The new act extends
the deadline to assume or reject nonresidential real-estate leases
from 60 days to 120 days. 11 U.S.C. §365(d)(4)(A). Under the new act,
the bankruptcy court may, for cause shown, still extend the debtor’s
deadline to assume or reject. The court is prohibited, however, from granting
more than one 90-day extension. 11 U.S.C. §365(d)(4)(B). Thus, at
most, a debtor may have a total of 210 days to assume or reject nonresidential
leases. After that, the debtor will be able to obtain additional extensions
only if the landlord provides prior written consent.
Without the landlord’s prior written consent, the lease will
be deemed rejected (if not assumed within the deadline), and the debtor
will be required to immediately surrender the property to the landlord.
11 U.S.C. §365(d)(4)(A). EVICTION EXCEPTIONS The filing of a bankruptcy petition operates as an immediate
and automatic stay of the commencement or continuation of any judicial
proceeding against the debtor. 11 U.S.C. §362(a). This includes any
efforts by a landlord to evict or otherwise recover real property
leased by the debtor. Currently, if a debtor files bankruptcy at any
point before or during the eviction process, the landlord cannot proceed
until it obtains relief from the automatic stay.
The new act affords a benefit to residential landlords by providing
relief from the automatic stay in certain cases. Postjudgment Exception There is, however, a significant limitation to the application
of §362(b)(22). The automatic stay will apply for the first 30 days
of the bankruptcy case if: (1) the debtor includes with the bankruptcy
petition a certification stating that the debtor would be allowed
to cure the defaults under state law; (2) the debtor deposits with
the court at the time the case is filed any rent that would become
due during the first 30 days of the case; and (3) within 30 days after
the case is filed, the debtor cures all monetary defaults giving rise
to the eviction action. 11 U.S.C. §362(l). The landlord, however,
may object to the debtor’s certification. In that case, the bankruptcy
court will hear the matter within ten days after the landlord files
its objection. If the court upholds the landlord’s objection, the
automatic stay will immediately terminate, and the landlord will be
allowed to continue the eviction process. Other Exceptions CURING DEFAULTS As mentioned above, a debtor in bankruptcy can assume or reject certain contracts with its creditors. To assume an unexpired lease, the debtor must, among other things, cure all defaults under the lease, with certain exceptions. 11 U.S.C. §365(b). Due to ambiguities in the Code’s provisions governing the assumption of unexpired leases, courts do not agree on precisely what those exceptions are, particularly as they relate to the cure of nonmonetary defaults. Nonmonetary defaults may include the debtor ceasing operation of its business for an extended period of time or failing to meet performance goals. Because such defaults have occurred in the past, the debtor cannot cure them. The new act clarifies that debtors are not required
to retroactively cure prior nonmonetary defaults that, by their nature,
are incapable of cure. In cases involving nonresidential leases, the
new act contains specific provisions requiring post-assumption performance
of nonmonetary obligations. It also requires compensation to the landlord
for all pecuniary losses resulting from defaults arising from the
failure to operate in accordance with a nonresidential lease. Calculating
those pecuniary losses may prove difficult. Commercial landlords may
want to include a liquidated-damages provision in their leases that
sets forth the amount of pecuniary losses that would result from the
debtor’s failure to operate its business in accordance with the lease. REJECTION DAMAGES In some cases, the debtor will assume a lease, but later reject it. In this situation, courts disagree on the extent to which landlords may be entitled to an administrative expense claim (i.e., a claim paid before general unsecured creditors) for damages arising from the rejection, including lost future rent. The new act clarifies the extent to which a landlord is entitled to an administrative claim when the debtor assumes a nonresidential real-property lease, but later rejects it. New §503(b)(7) states that, with respect to nonresidential leases assumed and subsequently rejected, landlords are entitled to an administrative claim for all monetary obligations due (except penalties) for a period of two years following the rejection of the lease or abandonment of the premises, whichever occurs later, less payments received from third parties. Claims for the remaining amounts due under the lease will be subject to the cap imposed by §502(b)(6). Whether §503(b)(7) is viewed as an added administrative
claim or a limit on one that already exists depends on the jurisdiction.
In Minnesota, there is caselaw holding that the debtor’s post-assumption
rejection of a lease is a breach of that lease and results in an administrative
expense claim for all damages flowing from the breach, including future
rent. See In re Monica Scott, Inc., 123 B.R.
990 (Bankr. D. Minn. 1991). Thus, at least in some courts, §503(b)(7)
will likely reduce the amount of administrative expense claims allowed
to landlords whose nonresidential leases were assumed, but later rejected. CONCLUSION The extent to which the amendments described above will
affect landlords remains to be seen. It appears, however, that the
new act may (1) strengthen landlords’ negotiating power with respect
to the assumption and rejection of unexpired nonresidential leases,
(2) improve the landlords’ ability to commence and continue eviction
actions, (3) clarify the requirements for debtors to cure nonmonetary
defaults under real-property leases, and (4) reduce the amount and
number of administrative claims for landlords in most jurisdictions.
c CHRIS CAMARDELLO is an associate at Winthrop & Weinstine. His practice is focused in bankruptcy, creditors’ rights, and commercial litigation. |
