United States: Leases: Is Rejection The Same As Termination And Who Is The Tenant Anyway?

Last Updated: December 18 2013
Article by Vicki Harding

John Hilsman Inv., LLC v. Quality Properties, LLC, 500 B.R. 105 (N.D. Ala. 2013) -

A Chapter 11 debtor sought to assume a lease that had been assigned to it.  The landlord contended that rejection of the lease in a prior bankruptcy by the debtor's assignor caused the lease to terminate so that there was nothing for the current debtor to assume.  The bankruptcy court rejected the landlord's arguments and approved assumption of the lease; and the landlord appealed to the district court.

This case involves a series of three bankruptcies.  In the first bankruptcy case, Bruno's, Inc. assigned a ground lease to Bruno's Supermarkets, Inc. (Supermarkets), which immediately reassigned the lease to Quality Properties, LLC (Quality).  The landlord objected to the assignment.

While the landlord and Quality were still litigating the validity of the assignment in state court, Supermarkets filed a Chapter 11 bankruptcy.  In this second case, the bankruptcy judge determined that Supermarkets had a continuing contractual obligation to pay rent if Quality failed to do so.  So, the lease was treated as an executory contract that was deemed rejected in Supermarkets' bankruptcy.

A little over a year later, Quality filed its own bankruptcy and sought to assume the lease as assigned to it.  The landlord objected based on the argument that Supermarkets' rejection in its bankruptcy caused Quality to lose the leasehold estate it obtained through the assignment.  However, the Quality bankruptcy judge decided that at the time the lease was deemed rejected in the Supermarkets case (which had the effect of avoiding its contingent contractual obligations), Supermarkets was no longer the tenant under the lease since it retained no reversionary rights.  Consequently, the Quality bankruptcy judge concluded that all rights were vested in Quality, Supermarkets retained only liabilities, and Supermarkets' rejection did not affect Quality's leasehold interests.

The district court began by focusing on a distinction between §365(a) and §365(d)(4) of the Bankruptcy Code.  Section 365(a) is the general section that states that a lease or executory contract may be assumed or rejected, while §365(d)(4) relates specifically to leases of nonresidential property.  Under §365(d)(4), if a debtor fails to take action to assume or reject by designated deadlines then "an unexpired lease of nonresidential real property under which the debtor is the lessee shall be deemed rejected, and the trustee shall immediately surrender that nonresidential property to the lessor" (emphasis added).

The district court concluded that the reference to "lessee" in §365(d)(4) means a debtor with a possessory interest.  Under applicable state law, the effect of Supermarkets' assignment was to transfer all of its rights, including its possessory interest, to Quality without retaining any reversionary right.  (This is in contrast, for example, to a sublease for less than the full term of the lease – which would result in the premises reverting to the original tenant before the prime lease expired.)  Consequently, the district court concluded that §365(d)(4) was not applicable in this case, and instead rejection was governed by §365(a).  Under §365(a), there is no mandate for immediate surrender of the leased premises (with its implication that the lease is no longer in effect).

Besides, the court found that regardless of which section applies, rejection does not operate to terminate the lease, but rather constitutes a breach.  As articulated in an 11th Circuit case involving §365(a):  "[R]ejection does not embody the contract-vaporizing properties commonly ascribed to it. . . .  Rejection merely frees the estate from the obligation to perform; it does not make the contract disappear."

The court went on to discuss a variety of additional aspects of the issue, including (1) the point that other sections of §365 specifically refer to treatment of an executory contract as terminated (§365(h), (i), and (n)), and (2) the distinction between a sublease (in which the subtenant's rights are derivative of the prime tenant's rights) and an assignment in which the original tenant transfers all of its rights to its assignee.

The court also concluded that the Quality bankruptcy was the proper forum for determining the effect of Supermarkets' rejection of the lease on the rights of Quality (as opposed to the Supermarkets bankruptcy court).  Since the Supermarkets' rejection did not terminate the lease, Quality retained its assigned leasehold rights; and from the perspective of the Supermarkets bankruptcy, the extent of those rights was to be determined outside the Supermarkets bankruptcy.  When Quality filed its own bankruptcy, the assigned lease became an unexpired lease of the debtor that could be assumed or rejected in its own case.

Consequently, the district court affirmed the bankruptcy court order granting Quality's motion to assume the assigned lease.  (This decision is being appealed to the 11th Circuit.  So, this may not be the last word on the issue.)

In many circumstances all of the parties treat rejection of a lease (or executory contract) as the equivalent of termination.  However, as evidenced by this case, that is not a foregone conclusion.  So, it behooves a landlord to obtain explicit recognition of termination in an order dealing with rejection if that is what is intended.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Vicki Harding
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions