United States: What Every Landlord Should Know About Bankruptcy

Reprinted with permission, Retail Law Strategist, April 2002
Retail Law Strategist is a publication of The International Council of Shopping Centers.

A. Effect of Stay.
The filing of a voluntary or involuntary petition under the Federal Bankruptcy Code acts as an automatic injunction which immediately stays all actions and proceedings against the debtor or its property. 11 U.S.C. § 362. Consequently, a landlord may not initiate or continue, through court proceedings or otherwise, any action to enforce its remedies again a defaulting tenant who has filed a bankruptcy petition. E.g. In re Royal Yarn Dyeing Corp. 114 B.R. 852 (Bankr. E.D. N.Y. 1990). Even sending a default notice post-petition violates the automatic stay. In re Merchants Plaza, Inc. 25 B.R. 888 (Bankr. E.D. Tenn 1983). See also In re Sixteen to One Mining Corp., 9 B.R. 636 (Bankr. D. Nev. 1981) (landlord can send post-petition default notices if not seeking possession of the estate, but merely to notify the debtor of any defaults in the event that the lease is assumed.) The automatic stay also prohibits a landlord from applying a security deposit against amounts due under a lease. 11 U.S.C. § 362(a)(7). But the automatic stay does not prevent a draw upon a letter of credit given as security under a lease because the draw is not an act against the debtor or its property See In re Page, 18 B.R. 713 (D.D.C. 1982.) or a suit against a guarantor to enforce a lease guaranty.

B. Lease Termination.
Section 362(b)(10) of the Code expressly excludes from the operation of the automatic stay any act by a landlord under a non-residential lease which has terminated "by the expiration of the stated term" of the lease, whether prior or subsequent to the filing of a bankruptcy petition. This is consistent with Section 541(b)(2), which provides that the property of the debtor’s estate does not include a non-residential lease if its stated term expires prior to the filing of the petition (and such lease ceases to be property of the estate if its stated term expires post-petition).

The courts have also held that the automatic stay will not apply to a lease that has expired by its terms (either before or after the filing of the petition) and to any lease which has been terminated successfully pre-petition. See In re Triangle Laboratories, Inc., 663 F.2d 463 (3d Cir. 1981); In re West Pine Const. Co., 80 B.R. 315, 319-320 (Bankr. E.D. Pa. 1987) (relying on legislative intent to hold that the automatic stay was not applicable to leases that had been terminated under state law for reasons other than the expiration of their term). Consequently, if the landlord is able to effectively terminate the lease under applicable non-bankruptcy law prior to the filing of the bankruptcy petition, the lease may not be assumed or assigned by the debtor and is not part of the debtor’s estate. 11 U.S.C. § 365(c)(3). In this situation, the landlord will be granted relief from the automatic stay in order to pursue eviction under state law. In re Odd’s-N-End’s, Inc., 171 B.R. 10 (Bankr. W.D. N.Y. 1994). However, the bankruptcy court has jurisdiction to determine whether the lease was validly terminated pre-petition under applicable state law. E.g. In re Neville, 118 B.R. 14 (Bankr. E.D. N.Y. 1990). Since virtually all leases provide for Notice and cure rights before a landlord is entitled to terminate, it is important that landlords send out default notices promptly. A landlord may also consider including in the default notice a statement to the effect that the lease will terminate unless the default is cured within the requisite cure period (as opposed to reserving to the landlord the right to subsequently elect to terminate).

C. Effect of Bankruptcy on Cure Period.
Section 108(b) of the Code provides that if an agreement fixes a period within which the debtor can cure a default, the default can be cured on the later of the expiration of the cure period specified in the agreement or (2) 60 days after the filing of the bankruptcy petition. Courts are split as to whether a commercial lease in which the cure period has not expired at the time the bankruptcy petition is filed is governed by Section 108(b) or Section 365. Compare Counties Contracting and Const. Co. v. Constitution Life Ins. Co., 855 F. 2d 1054 (3d Cir. 1988); In re Players’ Pub, Inc., 45 B.R. 387 (Bankr. D. Mass. 1985) (both holding that 108(d) controls) with Moody v. Amoco Oil Co., 734 F.2d 1200 (7th Cir. 1984); In re Round Hill Travel, Inc., 52 B.R. 807 (Bankr. D. Nev. 1985) (both holding that 365 controls). If Section 365 governs, bankruptcy court, on request of the debtor, can extend the date for curing the default (i.e. date by which the lease must be assumed) beyond the 60 day initial deadline "for cause." If Section 108(b) governs, the 60-day cure period is not subject to extension. The weight of authority appears to be that Section 365 controls.

A. Ipso Facto Clauses Unenforceable.
Section 365 of the Code deals with the assumption, rejection and assignment of executory contracts and unexpired leases. Commercial leases typically contain clauses stating that bankruptcy is an event of a default. However, such lease provisions (commonly known as "ipso facto clauses") are unenforceable in bankruptcy. 11 U.S.C. § 365(e)(1). This general bankruptcy rule does not apply if applicable non-bankruptcy law excuses the non-debtor party from either accepting performance or rendering performance from, or to, the other party and the non-debtor party does not consent to the assignment or assumption of the lease. In such circumstances the "ipso facto" clauses are enforceable. 11 U.S. C. § 365 (e)(2). This exception is for all practical purposes inapplicable to commercial leases.

Ipso facto clauses are also enforceable in executory contracts to make a loan or to extend other debt financing or financing accommodations to or for the benefit of the debtor. 11 U.S.C. § 365(e)(2). Such executory contracts cannot be assumed in bankruptcy (whether or not the other party consents). 11 U.S. C. § 365 (c)(2). This exception has been strictly construed by the courts and applies only to contracts that are for the primary purpose of extending money or credit to or for the debtor. See In re Thomas B. Hamilton Co., 969 F.2d 1013 (11th Cir. 1992). This raises the issue of whether a lease which requires the landlord to provide a tenant improvement allowance or to construct the tenant improvements, and provides that such costs will be amortized in rent payable over the lease term is a contract to extend a "financial accommodation" to the tenant. If it is, the lease cannot be assumed in bankruptcy. The courts are divided on this issue. Compare In re Postle Enterprises, Inc., 48 B.R. 721 (Bankr. D. Ariz. 1985) (court barred assumption of lease by which debtor would convert movie theater into a dinner theater and landlord would pay debtor a $150,000 tenant allowance, all post-petition) with In re United Press International, Inc., 55 B.R. 63 (Bankr. D.D.C. 1985) (debtor allowed to assume lease by which landlord was required to make "ordinary" tenant finish – electrical outlets, plumbing and cubical installation – to office premises for occupancy by the debtor).

B. Basic Assumption Rules.
Section 365 of the Code permits the debtor, subject to the court’s approval, to assume or reject any unexpired lease of the debtor. 11 U.S.C. § 365 (a). Rejection of the lease constitutes a breach of the lease as of the date prior to the date of filing and allows the landlord to file a claim for damages as an unsecured creditor. Rejection does not constitute "termination" of the lease. In re Austin Dev. Co., 19 F.3d 1077, 1082 (5th Cir. 1994), cert. denied, 513 U.S. 874 (1994); In re Tri-Glied Ltd., 179 B.R. 1014 (Bankr. E.D.N.Y. 1995); In re Empire Knitting Mills, Inc., 123 B.R. 688, 691 (Bankr. D. Me. 1991). Consequently, a rejection should not affect the rights of third parties who have an interest in the leasehold estate, i.e. such as subleases and leasehold mortgagees. After the lease is assumed, the debtor in possession can elect to either continue to occupy the space or assign the lease to a third party. Bankruptcy Rule 6006 states that motions to assume or reject leases are contested matters, subject to the procedural requirements of Rule 9014. Relief must be requested by motion, served on opposing parties in the manner prescribed for service of complaints as set forth in Rule 7004, and the landlord must be given a reasonable opportunity to be heard. However, the decision to assume or reject an unexpired lease is within the reasonable business judgment of the debtor, and the views of the landlord are therefore essentially irrelevant to the decision. In re Orion Pictures Corp. 4 F.3d 1095, 1098 (2d Cir. 1993). As a basic rule of thumb: if the lease can be sold to a third party at a profit or if the lease is essential for the operation of the debtor’s business, the debtor will want to assume it. If neither factor is present, it won’t.

C. Time Limits for Acceptance or Rejection.
Section 365(d)(4) provides that a commercial lease must be assumed or rejected with 60 days after the filing of the petition "or within such additional time as the court, for cause, within such 60 day period, fixes . . . ." If not assumed within the 60 day period (as extended for cause) the lease is deemed rejected. Debtors regularly move to extend 60 day period (sometime until confirmation of a plan of reorganization) and bankruptcy courts are usually receptive to motions to extend. The majority of courts have ruled that a motion to extend the time to assume a commercial lease which is filed before the 60 th day prevents a "deemed" rejection even if the extension itself is not obtained until after the 60 days has expired. In re Southwest Aircraft Services, Inc., 831 F.2nd 848 (9th Cir. 1987), cert. denied, 108 S. Ct. 2848 (1988) (the "cause" must arise, and the motion must be filed, within the 60 day period); In re Garrett Rhodes Supermarket, Inc., 95 B.R. 902 (E.D. Pa. 1989); In re Wedtech Corp., 72 B.R. 464 (Bankr. S.D. N.Y. 1987); In re Unit Portions of Delaware, Inc., 53 B.R. 83 (Bankr. E.D. NY. 1985); In re By-Rite Distributing, Inc., 55 B.R. 740 (D. Utah 1985); In re Bon Ton Restaurant and Pastry Shop, Inc., 52 B.R. 850 (Bankr. N.D. Ill. 1985); In re National Paragan Corp., 74 B.R. 180 (E.D. Pa. 1987). Contra: In re Coastal Industries, Inc., 58 B.R. 48 (Bankr. D. N.J. 1986); In re Swiss Hot Dog Co., 72 B.R. 569 (Bankr. D. Col. 1987); In re Treat Fitness Center, Inc., 60 B.R. 878 (B.A.P. 9th Cir. 1986); In re J. Woodson Hays, Inc., 69 B.R. 303 (Bankr. M.D. Fl. 1987); In re Victoria Station, Inc., 840 F.2nd 682 (B.A.P. 9th Cir. 1988). It is also clear that bankruptcy courts have the power to grant more than one extension of the 60 day time period. In re Victoria Station, Inc. Supra; In re Channel HomeCenters, Inc., 989 F.2nd 682 (3rd Cir. 1993); Tiger Restaurant Inc., v. Rouse S. I. Shopping Center, Inc., 79 B.R. 954 (E.D. N.Y. 1987).

In deciding whether to grant motions to extend, bankruptcy courts generally consider one or more of the following factors:

1. Whether the lease is a primary asset of the debtor’s estate and whether the decision of whether to assume or reject would be central to a plan of reorganization.

2. Whether the landlord has a reversionary interest in an improvement built by the tenant which would result in a windfall to the landlord should the lease automatically terminate.

3. Whether the debtor has had the time necessary to intelligently appraise its financial situation and the potential value of the lease in terms of its plan of reorganization.

4. Whether the debtor has paid post-petition rent.

5. Whether the landlord will be damaged beyond compensation available to it under the Bankruptcy Code through the debtor’s continued occupation.

6. Whether the debtor’s business is exceptionally complex and involves a large number of leases.

It is possible for the landlord to expedite the 60 day period, but this tactic is rarely successful. Only a few cases have ordered acceleration. In re Merchants Plaza, Inc., 35 B.R. 888 (Bankr. E.D. Tenn. 1983); In re Loop Hosp. Partnership, 35 B.R. 929 (Bankr. N.D. Ill. 1983); In re Anderson 36 B.R. 120 (Bankr. D. Haw. 1983). Some courts have taken the financial needs of the landlord into account and shortened the time. In re Taber Farm Associates, 115 B.R. 455 (Bankr. S.D. N.Y. 1990); Escondido Mission Village, L.P. v. Best Products Co., Inc., 137 B.R. 114 (S.D. N.Y. 1992).

Some courts have held a landlord can waive the deemed rejection of the lease by its conduct. In re T. H. W. Enterprises, Inc., 89 B.R. 351 (Bankr. S.D. N.Y. 1988) (landlord accepted rent for 14 months, had knowledge of the bankruptcy proceeding and did not move to lift the stay or have the lease terminated or to advise the debtor that it considered the lease rejected; court ruled landlord had waived the deemed rejection); In re Austin, 102 B.R. 897, 901 (Bankr. S.D. Ga. 1989) (landlord’s right to rely on Section 365(d)(4) waived where landlord knew about chapter 11 filing and accepted rent for two years thereafter); In re Dulan, 52 B.R. 739, 741 (Bankr. C.D. Cal. 1985) (letter from landlord after deemed rejection seeking rent and adequate protection constituted a waiver under the circumstances). But see In re Food Barn Stores, Inc., 174 B.R. 1010 (Bankr. W.D. Mo. 1994) (acceptance of rent and demand for cure payments not a waiver).

D. Requirements for Assumption.
If no default has occurred under an unexpired lease, the debtor has the unfettered right to assume the lease. In re Perretta, 7 B.R. 103 (Bankr. N.D. Ill. 1980); but see In re Currivan’s Chapel of the Sunset, 51 B.R. 217 (N.D. Cal. 1985). If a default exists, which is almost always the case, the debtor has the burden of showing that the proposed assumption meets all the requirements of Section 365(b) of the Code. See In re Rachel’s Industries, Inc., 109 B.R. 797 (Bankr. W.D. Tenn. 1990). Section 365(b)(1) provides that the debtor cannot assume a lease in default unless the debtor:

1. cures or provides adequate assurance that it will promptly cure all defaults;
2. compensates or provides adequate assurance that it will compensate the landlord for any actual pecuniary loss resulting from such defaults; and,
3. provides adequate assurance of future performance under such lease.

E. Adequate Assurance of Future Performance.
Although "adequate assurance of future performance" does not require that the debtor provide a "guaranty", it must submit non-speculative evidence that it will satisfy each of Section 365(b)’s requirements. See Carlisle Homes, Inc. v. Azzari (In re Carlisle Homes, Inc.), 103 B.R. 524, 538 (Bankr. D. N.J. 1989). See also In re Natco Industries, Inc., 54 B.R. 436, 440 (Bankr. S.D. N.Y. 1985) (adequate assurance of future performance does not mean an absolute assurance that debtor will thrive and pay rent); In re Bon Ton Restaurant & Pastry Shop, Inc., 53 B.R. 789, 803 (Bankr. N.D. Ill. 1985) ("[a]lthough no single solution will satisfy every case, the required assurance will fall considerably short of an absolute guarantee of performance"). The adequate assurance requirement may be satisfied by demonstrating the assignee’s business track record, financial capacity and managerial experience. In re Bygraph, Inc., 56 B.R. 596, 605-06 (Bankr. S.D. N.Y. 1986) (adequate assurance requirement satisfied when assignee demonstrated substantial financial resources and expressed willingness to provide sufficient funding to the business to give it strong likelihood of success.); In re Future Growth Enterprises, Inc., 61 B.R. 469 (Bankr. E.D. Pa. 1986) (adequate assurance not present where the debtor proposed to cure its default by the payment of money over a period of time, but its financial reports indicated that it was unlikely that there would be sufficient cash to meet its obligations.).

Adequate assurance of future performance can be established by posting security. See, e.g., In re Westview 74 th Street Drug Corp., 59 B.R. 747 (Bankr. S.D. N.Y. 1986) (a security deposit may constitute adequate assurance); In re Alipat, Inc., 36 B.R. 274 (Bankr. E.D. Mo. 1984) (a letter of credit may constitute adequate assurance); In re Peterson’s Ltd., Inc., 31 B.R. 524 (Bankr. S.D. N.Y. 1983) (a certificate of deposit may constitute adequate assurance).

F. Standard for Assumption and Assignment of Shopping Center Leases.
In addition to meeting all the requirements of Section 365(b)(1) listed above, debtors seeking to assume and assign shopping center leases must comply with the specific additional standards for adequate assurance set forth in Section 365(b)(3), which are:

1. The financial standing of the assignee must be similar to that of the original tenant and any guarantor as of the date that the lease was executed.
2. The debtor must provide (necessarily speculative) evidence that there will be no substantial decline in percentage rent.
3. The assumption and assignment must be subject to all the provisions of the lease, including, without limitation, radius, location, use and exclusivity provisions, and will not breach any provision contained in any other lease, financing agreement or master agreement relating to the shopping center.
4. The assumption and assignment will not disrupt any tenant mix and balance in the shopping center. Although a plain reading of the language of the statute does not condition this requirement on the presence of a similar provision in the lease, some courts have refused to consider tenant mix unless the proposed use is inconsistent with express language of the lease. In re Ames Dep’t. Stores, 121 B.R. 160, 164-65 (Bankr. S.D.N.Y. 1990) (Section 365(b)(3)(D)’s protection of tenant mix extends only as to contractual provisions regarding use rather than general notions of tenant mix).

The Code contains no definition of the term "shopping center." It may therefore be helpful (although not dispositive) for a lease to expressly describe the "shopping center" and affirmatively state that the premises are part of a "shopping center."

G. Prompt Cure.
What constitutes "prompt" cure of existing defaults? The nature of the default, the remaining term of the lease and any security to be provided are some of the factors the courts consider. In re Coors of North Mississippi, Inc., 27 B.R. 918 (Bankr. N.D. Miss. 1983), (holding that curing a $110,000 default over a three year period was "prompt" under the circumstances); In re Bon Ton Restaurant and Pastry Shop, Inc., 53 B.R. 789 (Bankr. N.D. Ill. 1985) (90 day cure period held "prompt" under the circumstances); In re Belize Airways, Ltd., 5 B.R. 152 (Bankr. S.D. Fla. 1980) (prompt cure required payment within 15 days of final assumption order). In re R/P International Technologies, Inc., 14 Bankr. Ct. Dec. 106 (Bankr. S.D. Ohio 1985). (Payment of the arrearages over a five year period, which was virtually coextensive with the term of the lease, was not a "prompt cure").

What if the default is a violation of a "continuous operation" covenant? Is that a curable default or a "historical fact" that cannot be cured? The courts are split. Compare: R.H. Macy & Co., 170 B.R. 69 (Bankr. S.D.N.Y. 1994) (not enforceable in bankruptcy ) with In re Claremont Acquisition Corp. 113 F.3d 1029 (9th Cir. 1997) (enforceable and incurable).

H. Payment of Attorneys’ Fees.
Generally, attorneys’ fees provision in leases are enforceable in bankruptcy, subject only to a reasonableness standard. In re Ribs of Greenwich Village, Inc., 57 B.R. 319 (Bankr. S.D. N.Y. 1986); In re Narragansett Clothing Co., 119 B.R. 388 (Bankr. D. R.I. 1990); In re Westview 74 th Street Drug Corp., 59 B.R. 747 (Bankr. S.D. N.Y. 1986); In re Bullock, 17 B.R. 438 (Bankr. 9th Cir. 1982). At least one court has held that payment of attorneys’ fees is a component of the cure and an assumption of a contract, regardless of whether there is a contractual obligation to pay attorneys’ fees. See, e.g., In re Foreign Crating, Inc., 55 B.R. 53 (Bankr. E.D. NY. 1985); In re J. W. Mays, Inc., 30 B.R. 769 (Bankr. S.D. N.Y. 1983). However, the majority view is that the "cure and compensate" requirement of Section 365(b)(1) grants landlords no independent right to attorney fees. See In re Westside Print Works, Inc., 180 B.R. 557, 563-64 (9th Cir. B.A.P. 1995) (landlord not entitled to attorney fees where lease did not provide for the payment of landlord’s attorney fees); In re F & N Acquisition Corp., 152 B.R. 304, 308 (Bankr. W.D. Wash. 1993) (lease provided that each party was responsible for its own attorney fees, and the court held that landlord was therefore not entitled to such fees under Section 365(b)(1)(B)); In re Ryan’s Subs, Inc., 165 B.R. 465, 469 Sutherland Asbill & Brennan LLP 8 (Bankr. W.D. Mo. 1994) (the lease provisions determined the landlord’s right to recover its attorney fees). Contra: In re Foreign Crating Inc., 55 B.R. 53 (Bankr. E.D. NY. 1985).
I. Interest and Late Charges.

Landlords are entitled to interest and late charges on delinquent rent. As long as the lease provides for the payment of interest and/or late charges the only issue for the court to decide is whether the charges are reasonable. See, e.g., In re Melbelle Associates, Inc., 99 B.R. 31 (Bankr. E.D. Cal. 1989) (holding that late charges of 4% and interest at 9.75% was reasonable); In re Westview 74 th Street Drug, 59 B.R. 747 (Bankr. S.D. N.Y. 1986); In re Diamond Head Emporium, Inc., 69 B.R. 487 (Bankr. D. Haw. 1987); and In re Joshua Slocum, Ltd., 103 B. R. 601 (Bankr. E.D. Pa. 1989). If the lease or state law provides, curing the default must include payment of interest. In re Westview, 74 th Street Drug, 59 B.R. 747 (Bankr. S.D. N.Y. 1986); In re Eagle Bus Mfg., Inc., 148 B.R. 481 (Bankr. S.D. Tex. 1992) (if neither lease nor state law requires payment of interest, debtor need not pay interest to cure defaults).

J. Breach of an Assumed Lease.
If a lease is assumed, any damages resulting from a subsequent breach or termination are treated as a priority administrative expense. 11 U.S.C. § 365(g). See also NLRB v Bildisco & Bildisco, 465 U.S. 513 (1984); In re Braniff Airways, Inc., 783 F. 2nd 1283 (5th Cir. 1986); In re Monica Scott, Inc., 123 B.R. 990 (Bankr. D. Minn. 1991).

K. Effective Date of Rejection.
Notwithstanding the explicit statutory language, debtors often attempt to have a lease rejection made retroactive to some date prior to the bankruptcy court’s approval of the debtor’s motion to reject – usually the date of the filing of the bankruptcy petition, regardless of whether the debtor occupied the premises post-petition. If effective, this tactic will eliminate any debtor liability for post-petition rent. However, most courts have held that rejection is not effective until the date approved by the court and that the obligation to pay administrative rent continues through that date. In re Arizona Appetito’s Stores, Inc., 893 F.2d 216, 219 (9th Cir. 1990); In re Thinking Machines, 67 F.3d 1021 (1st Cir. 1995); In re National Oil Co., 80 B.R. 525, 526 (Bankr. D. Col. 1987); In re Federated Department Stores, Inc., 131 B.R. 808, 815 (S.D. Ohio 1991); In re Revco D. S., Inc., 109 B.R. 264 (Bankr. N.D. Ohio 1989); In re D’lites of America, Inc., 86 B.R. 299 (Bankr. N. D. Georgia 1988); In re Four Star Pizza, Inc., 135 B.R. 498, 501 (Bankr. W.D. Pa. 1992); In re Worth’s Stores Corp., 130 B.R. 531, 533 (Bankr. E.D. Mo. 1991). However, a few courts have held that rejection is effective retroactively to either the date the motion to reject was filed or the date that the debtor notified the landlord of its intent to reject. The rationale for these decisions is that court approval is not a condition precedent to rejection, but merely ratification of the rejection, which is fully performed by the debtor prior to court approval. E.g. In re Joseph C. Spiess Co., 145 B.R. 597, 600 – 03 (Bankr. N.D. Ill. 1992). See also In re Thinking Machines, 67 F.3d 1021, 1029 (1st Cir. 1995) (bankruptcy court has the equitable power to order rejection retroactively to an earlier date).

L. Surrender of Premises Upon Rejection.
Upon a "deemed" rejection, Section 365(d)(4) requires that commercial premises be "immediately surrendered" to the landlord. The Code does not expressly require "immediate surrender" of the premises if the lease is rejected other than via a deemed rejection. Predictably, the courts are split on the issue of whether the bankruptcy court has the power to order the debtor to immediately surrender the premises to the landlord or whether the landlord must exercise its state court remedies to obtain possession of the premises. Compare: In re Williams, 171 B.R. 420 (Bankr. S.D. Ga. 1994) (state court or adversary proceeding required) with In re U.S. Fax, Inc.,.114 B.R. 70, 70-71 (E.D. Pa. 1990); In re Salzer, 52 F.3d 708, 713 (7th Cir. 1995), cert. denied, 116 S. Ct. 1273 (1996); In re Elm Inn, Inc., 942 F.2d 630, 633 (9th Cir. 1991); In re Damianopoulos, 93 B.R. 3, 8 (Bankr. N. D. N.Y. 1988); In re Giles Associates, Ltd., 92 B.R. 695 (Bankr. W.D. Tex. 1988); In re O.P. Held, Inc., 77 B.R. 388, 391 (Bankr. N.D. N.Y. 1987); In re Fosko Markets, Inc., 74 B.R. 384, 390 (Bankr. S.D.N.Y. 1987); In re Hurst Lincoln-Mercury, Inc., 70 B.R. 815, 817 (Bankr. S.D. Ohio 1987); In re Bernard, 69 B.R. 13 (Bankr. D. Haw. 1986); In re Southwest Aircraft Services, Inc., 53 B.R. 805 (Bankr. C.D. Cal. 1985); aff’d, 66 B.R. 121 (Bankr. 9th Cir. 1986), rev’d on other grounds, 831 F.2d 848 (9th Cir. 1987). The clear weight of authority is that the landlord is entitled to an order compelling an immediate surrender of the premises.

M. Post-Petition Leases Cannot be Rejected.
Section 365 does not entitle the debtor to reject leases entered into post-petition. Post-petition leases are not governed by Section 365 at all, but rather by Section 363, governing the use, sale and lease or property by the debtor. In re Dant & Russell, Inc., 853 F.2d, 700, 706, (9th Cir. 1988); In re Airport Executive Center, Ltd., 138 B.R. 628, 629 (Bankr. M.D. Fla. 1992); In re Mushroom Transp. Co., Inc., 78 B.R. 755, 760- 61 (Bankr. E.D. Pa. 1987).

A. Anti-Assignment Provisions Unenforceable.
Leases which prohibit or restrict assignments are unenforceable in bankruptcy. Accordingly, provisions in leases providing for assignment fees or profit sharing have been held to be unenforceable. In re Standor Jewelers West, Inc., 129 B.R. 200, 201-02 (9th Cir. B.A.P. 1991); In re National Sugar Refining Co., 21 B.R. 196, 198 (Bankr. S.D. N.Y. 1982). See also In re Federated Department Stores, Inc., 126 B.R. 516 (Bankr. S.D. Ohio 1990) (prohibition in lease on assignment unenforceable in bankruptcy regardless whether enforceable under applicable state law). Similarly, first refusal and recapture rights are generally unenforceable in bankruptcy. In re Rancourt, 153 B.R. 380 (Bankr. D. N.H. 1993); In re R.H. Macy & Co. Inc., 170 B.R. 69 (Bankr. S.D. N.Y. 1994). At least one court has held that a use provision may be unenforceable in situations where adherence to a use clause would be "impossible" or where the purpose behind the drafting of the use provision was intended as a de facto anti-assignment clause; In re Rickel Home Centers, Inc., 240 B.R. 826 (D. Del. 1998). In Rickel, the use clause required a specific name to be used by the tenant. Similarly, lease provisions which require landlord consent for even "cosmetic" alterations to the premises may not be enforceable in bankruptcy if used as de facto anti-assignment provisions.

B. Requirements for Assignment.
A debtor can assign a lease only if the lease has been assumed and the assignee provides adequate assurance of the future performance (whether or not there has been a default). 11 U.S.C. § 365(f)(2). Section 365(l) provides that if an unexpired lease is assigned, the landlord may require a deposit or other security for performance substantially the same as what would have been required by the landlord upon the initial leasing to a similar tenant. As noted earlier, there are special rules regarding the assignment of shopping center leases.

A. Post-Petition Rent Must Be Paid When Due.
Section 365(d)(3) expressly provides that the debtor must perform all its obligations (other than ipso facto clauses and payment of penalties) accruing from and after the date of the filing of the bankruptcy petition until the lease is assumed or rejected. Section 365(d)(3) also provides that the bankruptcy court can extend, for cause, the time for performance of any such obligations which arise within 60 days after the filing of the petition, but not beyond the 60 day period. Most courts have interpreted Section 365(d)(3) as requiring the debtor to pay the rent specified in the lease (rather than the "fair market" rental value). In re Pacific-Atlantic Trading Co., 27 F. 3d 401 (9th Cir. 1994); In re Worth’s Stores Corp., 135 B.R. 112 (Bankr. E.D. Mo. 1991); In re Virginia Packaging Supply Co. Inc., 122 B.R. 491 (Bankr. E.D. Va. 1990); In re National Oil Co., 80 B.R. 525 (Bankr. D. Colo. 1987); In re Longua, 58 B.R. 503 (Bankr. W.D. Wis. 1986). Contra: In re The Bedroom of Central Florida, Inc., 150 B.R. 982 (Bankr. M.D. Fla. 1993). The debtor must also pay, in addition to rent, common area maintenance charges, taxes, interest, late charges, and attorneys’ fees provided in the lease. In re MS Freight Distribution, Inc., 172 B.R. 976 (Bankr. W.D. Wash. 1994).

B. Pre-Petition or Post-Petition?
Are rent and other lease charges which relate to periods after the filing of the bankruptcy petition but which become due pre-filing treated as post-petition administrative expenses or as part of the landlord’s pre-petition claim? And what about charges accruing pre-filing but which are billed post-filing? Courts are divided over how to treat post-petition invoices that include pre-petition obligations. Compare: In re Koenig Sporting Goods, 203 F.3d 986 (6th Cir. 2000) (no proration) with In re Handy Andy Improvement Centers, Inc., 144 F.3d 1125 (7th Cir. 1998) (proration approved). Most courts hold that if real estate taxes accrue pre-petition, the obligation to pay such taxes is an unsecured pre-petition debt to the landlord, not post-petition obligation, even where the payment to the landlord became due after the filing of the petition and prior to the rejection of the lease. In re Warehouse Club, Inc., 184 B.R. 316, 317 (Bankr. N.D. Ill. 1995) (reasoning that the payment of pre-petition taxes does not serve Section 365(d)(3)’s purpose of protecting landlords from becoming involuntary post-petition creditors of a tenant’s estate); In re R. H. Macy & Co., Inc., 173 B.R. 470, 472 (Bankr. S.D. N.Y. 1994) (finding that for taxes and CAM charged that accrued pre-petition under an operating agreement, but for which debtor was billed post-petition, constituted a pre-petition claim); In re Ames Department Stores, Inc., 136 B.R. 353, 356-57 (Bankr. S.D. N.Y. 1992). On the other hand, a few cases hold that taxes do not accrue until the bill is received. In re F & M Distributors, Inc., 197 B.R. 829, 831 (E. D. Mich. 1995) (tax obligations do not arise until the obligation to pay matures). Some courts have refused to require the debtor to pay as an administrative expense prorated rent for the portion of the month that is post-petition where the rent for the month of filing was due pre-petition. In re Appletree Markets, Inc., 139 B.R. 417 (Bankr. S.D. Tex. 1992) (court adhered to unambiguous language of Section 365(d)(3), requiring timely performance of all obligations of the debtor from and after the petition date, and denied proration of rent where petition was filed one day after rent was due). See also In re Montgomery Ward Holding Corp., 268 F.3d 205 (3rd Cir. 2001) (no proration). Contra: In re Swanton Corp., 58 B.R. 474, 475 (Bankr. S.D. N. Y. 1986) (stating that "[e]quity demands proration" in this circumstance, for both the landlord and the debtor).

A. Types of Claims.
Landlords are generally entitled to three types of claims:

1. an administrative priority claim for post-petition obligations under the lease through the effective date of rejection,
2. an unsecured claim for any pre-petition delinquencies pursuant to Section 502(b)(6)(b) and
3. an unsecured claim for damages upon rejection, calculated as if the lease were breached immediately prior to the filing of the bankruptcy petition pursuant to Sections 365(g)(1) and 502(g).

B. Section 502(b)(6) Damages Cap.
The third type of claim, rejection damage claims, are subject to a cap. The cap is equal to the greater of one year’s rent or 15% of the rent due under the balance of the lease, not to exceed three years rent. 11 U.S.C. §502(b). Cases are split as to whether the 15% cap is a fraction of rent or time. Compare: In re Gantos, Inc., 176 B.R. 793 (Bankr. W.D. Mich. 1995) (15% applies to the remaining rent due under the lease); In re Farley, Inc., 146 B.R. 739, 747 (Bankr. N.D. Ill. 1992) (same); with In re Iron-Oak Supply Corp., 169 B.R. 414 (Bankr. E.D. Cal. 1994) (15% applies to the remaining term of the lease); Sunbeam-Oster Co., v. Lincoln Liberty Avenue, Inc., (In re Alleghency Int’l., Inc.), 145 B.R. 823 (W.D. Pa. 1992) (same).

C. Claims Not Subject to Cap.
Only damages that arise from the termination of a lease fall within the Section 502(b)(6) cap. Section 502(b)(6) of the Bankruptcy Code is thus intended to cap prospective damages claims only. See In re Atlantic Container Corp., 133 B.R. 980 (Bankr. N.D. Ill. 1991). Most courts have therefore held that claims that do not arise solely from rejection of a lease are not subject to the cap. See In re Farley, Inc., 146 B.R. 739 (Bankr. N.D. Ill. 1992) (damages from taxes assessed prior to rejection are not subject to cap); In re Bob’s Sea Ray Boats, Inc., 143 B.R. 229 (Bankr. D.N.D. 1992) (damages arising from debtor’s failure to surrender premises in as good a condition as received in violation of lease are not damages arising from rejection of lease, and therefore not subject to cap); In re Q-Masters, Inc., 135 B.R. 157 (Bankr. S.D. Fla. 1991) (damages arising from vandalism and the removal of equipment indemnified for in the lease not damages arising from rejection of lease, and therefore not subject to cap); In re Atlantic Container Corp., 133 B.R. 980 (Bankr. N.D. Ill. 1991) (damages arising from debtor’s failure to fulfill its obligation to remove and dispose of drums of waste materials not damages arising from rejection of lease, thus not subject to cap). Contra: In re Mr. Gatti’s, Inc., 162 B.R. 1004 (Bankr. W.D. Tex. 1994), (damages following the debtor’s rejection of the lease, including damages arising from the debtor’s failure to maintain premises capped by Section 502(b)(6)).

D. Rejection of Assumed Leases.
A debtor’s rejection of an assumed lease is deemed a breach of the lease as of the rejection date, and damages are entitled to administrative priority and the limitations set forth in Section 502(b)(6) for rejection damages do not apply. In re Klein Sleep Prods., Inc., 78 F.3d 18 (2d Cir. 1996). However, if a lease that was assumed in a reorganization case is subsequently rejected after conversation of the case to a Chapter 7 liquidation, the rejection is deemed to occur on the date prior to the conversion date and the priority of the landlord’s damage claim is subordinate to all Chapter 7 administration claims. 11 U.S.C. § 365(g).

A. In General.
A proof of claim is a written statement that sets forth a creditor’s claim and conforms substantially to the Official Form, which is attached hereto as Exhibit A. Bankruptcy Rule 3001(a). The proof of claim is deemed allowed unless any party in interest objects to the claim. 11 U.S.C. § 502(a). If an interested party objects, then the bankruptcy court, after notice and hearing, will determine the amount of the claim as of the date the petition was filed and will allow the claim to the extent that the claim is, among other things, enforceable and timely filed. 11 U.S.C. § 502(b).

B. Necessity of Filing a Proof of Claim.
Under the Code, the debtor is required to file with the court a schedule of its assets and liabilities along with a list of its creditors. 11 U.S.C. § 521(a). This schedule of liabilities is prima facie evidence of the validity and amount of each claim scheduled, unless the claim is scheduled as disputed, contingent or unliquidated. Bankruptcy Rule 3003(b)(1). Consequently, in the rare event that a creditor’s claim is clearly and accurately included on the debtor’s schedule of liabilities, the creditor does not need to file a proof of claim. However, in a breached lease context, it is unlikely in the extreme that a debtor will include the landlord’s claim on its schedule as an undisputed, unconditional and liquidated or even schedule the claim at all. The Rules allow any creditor to file a proof of claim, but they require a creditor whose claim is not scheduled or is scheduled as disputed, contingent or unliquidated to file a proof of claim. Bankruptcy Rules 3003(c)(1)-(2). Any creditor who is required to file a proof of claim and fails to do so will not be treated as a creditor for purposes of distribution. Bankruptcy Rule 3003(c)(2). Therefore, as a practical matter, every landlord should file a proof of claim on a timely basis to make sure that it will be treated as a creditor for purposes of distribution.

C. Who Must File a Proof of Claim.
Bankruptcy Rule 3001(b) states that "a proof of claim shall be executed by the creditor or the creditor’s authorized agent except as provided in Rules 3004 and 3005." Rules 3004 and 3005 allow a debtor or another similarly situated party to file the proof of claim in lieu of and for the creditor, but do not compel one of these parties to do so. Therefore, as a practical matter, if the creditor does not file a proof of claim, it will not be filed.

D. What is Needed to File a Proof of Claim.
As noted above, it is best to file the proof of claim using the attached Official Form. If a claim, or an interest in property of the debtor securing the claim, is based on a writing, such as a lease, then the original lease or a duplicate must be filed along with the proof of claim. Bankruptcy Rule 3001(c). If the lease has been lost or destroyed, then the creditor can attach to the form a statement of the circumstances which caused the loss or destruction. Bankruptcy Rule 3001(c). In addition, if the creditor is claiming a security interest in the debtor’s property, evidence that that security interest has been perfected must be filed with the proof of claim. Bankruptcy Rule 3001(d). A proof of claim that has been executed and filed in accordance with the Rules is prima facie evidence as to the validity and amount of the claim. Bankruptcy Rule 3001(f).

E. When a Proof of Claim Should be Filed.
Bankruptcy Rules 3002 and 3003 govern the deadline for filing a proof of claim with respect to an unexpired lease. Bankruptcy Rule 3002(c)(4) provides that a claim arising from an unexpired lease must be filed within such time as the court may direct. More generally, Rule 3003 states that in a Chapter 11 case the court shall fix the time in which a proof of claim or interest may be filed, and this time may be extended by the court for cause shown. Bankruptcy Rule 3003(c)(3). Rule 2002(a)(7) mandates that the court must give the debtor, any trustee and all creditors at least 20 days’ notice by mail of the time fixed for this deadline.

F. Consequences of Missing the Deadline.
As noted above, the court will not allow a claim to the extent that it is not timely filed. 11 U.S.C. § 502(b)(9). Also, if the creditor is required to file a proof of claim and does not do so, it will not be treated as a creditor for purposes of distribution. Bankruptcy Rule 3002(c)(2). It is therefore critical that a landlord file its proof of claim within the time period fixed by the court.

There are some exceptions, however, where the Rules allow a creditor to file a proof of claim even after the deadline has expired. Bankruptcy Rule 3003(c)(3) (listing Rules 3002(c)(2)–(c)(4) as exceptions to the normal Chapter 11 deadline). Of these exceptions, the one most relevant to the landlord-tenant context involves a claim arising from the rejection of an unexpired lease. Bankruptcy Rule 3002(c)(4). In this situation, a creditor may file a proof of claim within such time as the court may direct (typically in the order approving the rejection) despite the expiration of the prior deadline set by the court. Bankruptcy Rule 3002(c)(4). However, once this new deadline is set, the claim is treated as if it had arisen before the date the petition was filed, and all of the above rules, including the timing and necessity of filing the proof of claim, will apply. 11 U.S.C. § 502(g).