15 Jun Reject Commercial Leases Quickly, Says 8th Circuit BAP
If you have a commercial lease in bankruptcy, it pays to reject it quickly according to the Eighth Circuit Bankruptcy Appellate Panel.
When a business or individual with a lease on commercial real estate, like a store or (in this case) farmland, files bankruptcy, the debtor or trustee has the right to assume or reject the lease. And if they reject such a lease, the balance owed on it is not only treated as general, unsecured debt normally but it is also subject to a cap (Sec. 502(b)(6)) on the amount the landlord can even claim. This is one of the most powerful tools available to a business to reorganize — and key advantage to retailers trying to unload poor locations quickly.
But what happens if the rejection comes only after some payments come due under the lease? After all, if the location continued to be occupied and used, it either helped the debtor make money or at least provided an opportunity to do so. And the landlord could not re-lease the property to others.
So clearly the landlord is entitled to some payment for providing this benefit, and this is recognized in the bankruptcy code (in Sec. 365(d)(3)). But how much and at what priority?
There are two schools of thought in this, as in so many things. One group of courts conclude that the landlord ought to receive the pro-rata value of the property — for example by figuring out the effective per-day rent payment obligation and require the amount “earned” after the case was filed but before rejection to be paid as an “administrative” claim (which is generally paid prior to most other debts).
According to the BAP majority though, the law should be read to create a bright line based on the contract billing dates. So if, as in the case before the court, a very large rent payments comes due only a few days after the filing of the case, the debtor may be on the hook for the full amount of this not just as a debt in the case — but as an administrative claim over and above most other creditors.
In this case — Burival v. Roehrich (#08-6026) — the chief judge of the BAP dissented, arguing that while the landlord was certainly entitled to these amounts as a claim, the provision should not be read as actually providing for the post-petition, pre-rejection lease amounts as an administrative priority claim.
So while the decision itself puts a powerful tool in the hands of landlords and a greater opportunity for recovery in bankruptcy court, it will also inevitably mean that more debtors will have to consider very early in their case whether to gamble — at all — on a weak store recovering. To do so increases the downside of such a risk and effectively encourages debtors to ruthlessly slash underperforming locations immediately upon filing to preserve post-filing assets and cash flow.
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