4 Whether then-current market rent is above or below
the lease rent;
5 How the loss of the tenant would impact ownership’s
relationship with its mortgagee; and
6 Costs landlord would have to incur in order to replace
the tenant (e.g., brokerage or tenant allowance for tenant improvement).
have been rejected.
The model for assumption is located in section 365(a)
of the bankruptcy code. Section (a) provides that except
as postulated in sections 365(b), (c) and (d) the trustee
may, subject to the court’s approval, assume or reject any
unexpired lease of the tenant.
Tenants who want to assume leases are required to:
1 Cure any monetary defaults;
2 Compensate landlords for damages stemming from
3 Furnish adequate assurances that remaining obligations will be fulfilled; and
4 Satisfy all remaining obligations incurred under the
lease as though bankruptcy had never been filed.
OPTIMIZING YIELDS BY RECAPTURING
These types of common market factors will drive your
overriding objective during the post-filing period, optimizing the yield from the premises in question. The yield
includes not only rent per square foot, but the impact a
vacancy would have on the rest of the development. In
attempting to optimize yield, you must decide whether to
try and recapture the space or extend the tenant’s tenure.
When a tenant files for Chapter 11 Bankruptcy protection, you must act quickly by filing a Notice of Appearance
and Demand for Notices through counsel. As a result of taking these steps, you will receive notification of important
events in the case, including the tenant’s submission of a
budget in order to secure a debtor in possession financing.
OBJECTIONS TO THE TENANT’S ASSUMPTION
OF A LEASE
Take note of prevailing market conditions when determining how exacting to be in enforcing a tenant’s 365 obligations. For example, if a tenant is paying below market rent
and prospects for the premises are plentiful, the landlord
may forcefully pursue adequate assurance that remaining
obligations will be fulfilled. It is worth noting that Section
365(b)( 1) does not provide the landlord with the right to
escape from a lease merely because current market rents
are higher than the lease rent. Courts evaluate “adequate
assurance of future performance” on a case-by-case basis.
REJECTION AND ITS CONSEQUENCES
Rejection releases the tenant from rental payments as well
as other continuing lease obligations. Rejected leases are
regarded as having been defaulted just before the bankruptcy filing.
When a lease is rejected, the landlord is entitled to a
rejection damage claim—tantamount to a general unsecured claim—typically yielding only a fraction of the face
value of the claim. The landlord must bear in mind that
Section 502(b)( 6) of the bankruptcy code places a cap on
rejection damage claims. The cap limits rejection damage
claims to the amount of rent reserved under the lease,
without acceleration, for the greater of (a) one year, or
(b) 15 percent, not to exceed three years, of the remaining term of the lease, following the earlier of: (i) the filing
of the bankruptcy petition; and (ii) the date the landlord
recovered, or the tenant surrendered, the leased premises.
Landlords will be able to use this information to:
1 Ensure that rent is included in the tenant’s budget; and
2 Ascertain whether the tenant is capable of furnishing
adequate assurances that outstanding lease obligations will be fulfilled, with such assurances being
required for a tenant to assume a lease.
Nonresidential tenants who file a Chapter 11 case have
120 days within which to either assume or reject leases.
The court has the option of extending the 120 days by an
additional 90 days, if such an extension is warranted by
cause. The 210 days is a semi-hard cap, and no further
extensions may be granted without the landlord’s written
consent. If the tenant does not accept or reject the lease
by the end of the 210 day period, the lease is deemed to