Nonresidential Real Property Leases – How to Assume a Lease, Assign and Reject
Guest Post by Ira R. Abel, Esq., New York City
Before we discuss how to assume a lease, assign or reject a lease, let’s take a quick look at the different types of bankruptcy cases.
There are basically two kinds of bankruptcy cases – liquidation or reorganization.
Chapter 7 – is what used to be referred to as “straight bankruptcy” – at least that’s what my father called it. Everything the debtor owns is liquidated – that is, sold for cash – or abandoned as useless and of no value.
There are 5 kinds of reorganization cases:
1. Chapter 9: This chapter allows municipalities to reorganize. Only municipalities can file under Chapter 9. A famous example of a municipal bankruptcy was that of Orange County, California. More current ones are the City of Harrisburg (dismissed in December 2011) and Jefferson County, Alabama (filed on November 9, 2011).
2. Chapter 11: This is what is usually referred to as reorganization. It can also include liquidation. Famous examples are Chrysler and General Motors, which were reorganized, and Enron and Lehman Brothers, which were liquidated.
3. Chapter 12: This is for the reorganization of a family farmer.
4. Chapter 13: This is for the reorganization of an individual with regular income.
5. Chapter 15: This is for reorganizing multi-national companies.
Most likely, you’ll be involved in Chapter 7 and Chapter 11 cases, but the basics are very similar.
Performing And Non-Performing Assets
Two of the best ways to reorganize a company are to get rid of non-performing assets and raise cash, and assuming a lease presents an easy opportunity to do this.
In general, an asset that makes money for you is a performing asset (like the leases that generate your rent roll) and an asset that does not make money for you is a non-performing asset (like that annoying tenant in default).
One of the ways a chapter 11 debtor can get rid of non-performing assets is to get rid of (“reject”) non-performing leases. A simple way to raise cash is to sell (“assume and assign”) the leases. If the chapter 11 debtor thinks it will help in the reorganization – e.g., the lease is for a profitable location – it can also keep the lease (“assume a lease”).
A chapter 7 trustee can do the same things to raise money for creditors or eliminate burdensome liabilities. He or she just has to do it more quickly.
Assume Or Reject A Lease
For the most part, until the lease is actually assumed or rejected, the trustee or chapter 11 debtor must do everything it’s required to under the lease. Of course, payment of rent, additional rent and other lease costs are the primary items of concern.
However, the Court may, for cause, extend the time for performance of any of those obligations. The Court won’t do this unless you are told in advance about the Debtor’s request to extend that time.
The chapter 11 debtor can get a maximum of 210 days to figure out whether to assume or reject a lease. After that, the only way to get more time is to get the written consent of the landlord.
Assuming (or Assuming and Assigning) Leases
If the trustee or the chapter 11 debtor wants to assume a lease, he has to satisfy a few conditions before he can assume it, or assume and assign it.
First, and most important, the lease must still be in effect. If a warrant of eviction has been issued, the lease is dead and the trustee or chapter 11 debtor can’t use it.
Second, and only if there is a default (usually a monetary default) under the lease, the trustee or chapter 11 debtor must:
- Cure any defaults (e.g., pay all of the past rent, additional rent, etc.); and
- Pay any damages to third parties caused by the default
If he’s assuming the lease and assigning it to a new tenant, he has to “provide adequate assurance” that the new tenant has sufficient assets or income to pay the rent for the balance of the lease term. If you want to fight the assumption and assignment, this is pretty much the only issue you can fight over.
There are a few ways to do this, and all of them can be sneaky (or cool, if you are the debtor).
The first way, used in a lot of chapter 11 cases, is to send you a notice that says on such and such a date the lease is rejected. Watch out for this one – the debtor or the trustee can “back date” the rejection so that you can lose one month’s administrative claim (an “administrative claim” is usually paid dollar for dollar, rather than pennies on the dollar) for rent!
On the other hand, the debtor or trustee can just wait 60 days from the filing date (or any other date fixed by the Court) and the lease will be automatically rejected. You won’t get notice of the rejection and you’ll think you’re entitled to rent.
After rejection, you get the space back. You’ll probably have to do some clean up, and add that to your claim. More about claims in another post . . . .