United States: Lease Profit-Sharing Provision Unenforceable Condition To Assignment In Bankruptcy

Last Updated: February 2 2018
Article by Isel M. Perez

In Antone Corp. v. Haggen Holdings, LLC (In re Haggen Holdings, LLC), 2017 WL 3730527 (D. Del. Aug. 30, 2017), the U.S. District Court for the District of Delaware considered whether, as part of a bankruptcy asset sale, a chapter 11 debtor could assume and assign a nonresidential real property lease without giving effect to a clause in the lease requiring the debtor to share 50 percent of any net profits realized upon assignment. The district court ruled that, in approving the sale, the bankruptcy court did not err in holding that the profit-sharing provision was unenforceable under section 365(f)(1) of the Bankruptcy Code because it conditioned assignment of the lease.

Section 365(f)(1) and Profit-Sharing Provisions

Under section 365(f)(1), with certain exceptions, a bankruptcy trustee or chapter 11 debtor-in-possession ("DIP") may assign an executory contract or an unexpired lease notwithstanding a provision in the contract or lease or in applicable law that "prohibits, restricts, or conditions" assignment. The purpose of the provision is to maximize the value of a debtor's assets for the benefit of the estate and creditors. See Angelone v. Great Atlantic & Pacific Tea Co., Inc. (In re Great Atlantic & Pacific Tea Co., Inc.), 2016 WL 6084012, *4 (S.D.N.Y. Oct. 17, 2016) (affirming an order invalidating a profit-sharing clause in an assigned lease and stating that section 365(f) is a "powerful tool for advanc[ing] one of the Code's central purposes, the maximization of the value of the bankruptcy estate for the benefit of creditors") (internal quotation marks and citations omitted).

In addition, section 365(f)(3) of the Bankruptcy Code invalidates any provision in an executory contract or unexpired lease assigned by the trustee or DIP that "terminates or modifies, or permits a party other than the debtor to terminate or modify, such contract or lease or a right or obligation under such contract or lease on account of an assignment."

To be unenforceable under section 365(f)(1), a challenged provision does not have to directly prohibit assignment—indirect interference is sufficient. For example, many courts have held that a provision in a lease obligating the lessee to share with the landlord any profits realized from assignment is an unenforceable condition which limits "the debtor's ability to realize the full value of its leasehold interest" by requiring payment to one creditor and diminishing distributions to all other creditors. In re Jamesway Corp., 201 B.R. 73, 78 (Bankr. S.D.N.Y. 1996); accord In re Standor Jewelers West, Inc., 129 B.R. 200 (B.A.P. 9th Cir. 1991); Great Atlantic, 2016 WL 6084012, at *6.

In Haggen Holdings, the Delaware district court considered whether the bankruptcy court below erred in approving the assumption and assignment of a lease without enforcing a profit-sharing provision.

Haggen Holdings

Prior to filing for chapter 11 protection in September 2015 in the District of Delaware, Haggen Holdings, LLC, and its affiliates (collectively, the "Debtors") owned and operated 164 grocery stores and a pharmacy. In October 2015, the Debtors sought court approval of bidding and notice procedures to govern the sale of various stores, as well as the assumption and assignment of certain related executory contracts and unexpired leases, including a 1993 nonresidential real property lease (the "Lease") between one of the Debtors and Antone Corporation ("Antone"). The Lease provided that "[i]n the event Tenant assigns this Lease . . . , Tenant shall deliver to Landlord fifty percent (50%) of any 'net profits' . . . within thirty (30) days of Tenant's receipt thereof pursuant to such assignment."

After the Debtors filed a notice identifying Good Food Holdings (Bristol Farms) as the successful bidder for the store subject to the Lease, Antone objected to the sale and the assignment, contending that the Lease could not be assigned without enforcing the profit-sharing provision.

The Debtors argued that the profit-sharing provision in the Lease was unenforceable as an anti-assignment provision prohibited by section 365(f)(1). Antone countered that the profit-sharing provision at issue was distinguishable from similar provisions invalidated in other cases. According to Antone, the provision was a bargained-for term given in exchange for below-market rent, and it should therefore be enforced by the bankruptcy court.

The bankruptcy court overruled Antone's objection, concluding that the profit-sharing provision was unenforceable under section 365(f)(1). In approving the sale and the related assumption and assignment of the Lease, the court wrote that enforcing the profit-sharing provision "would defeat the purpose of section 365(f)(1), which is to . . . enable the Debtor to realize the full value of its assets." Antone appealed the ruling.

The District Court's Ruling

On appeal, Antone argued that the bankruptcy court erred by not analyzing the facts and circumstances of the case, including evidence of the bargained-for exchange of below-market rent and the profit-sharing provision. According to Antone, the profit-sharing provision was "economically interdependent" with the below-market rent provision and thus should have been enforced. The Debtors countered that the bankruptcy court correctly found that a profit-sharing provision, like the one in the Lease, is a de facto anti-assignment provision which is unenforceable under section 365(f)(1) on the basis of the plain language of the statute and the clear weight of authority.

The district court began its analysis by stating that de facto anti-assignment provisions include provisions which require payment of some portion of the proceeds or profit realized upon assignment, like the provision in the Lease. The court found that the provision at issue conditioned assignment because it required the Debtors to pay Antone 50 percent of net profits received if the Debtors assigned the Lease, which would result in a diminished distribution to all other creditors. The court ruled that, as a matter of law, the profit-sharing provision in the Lease was unenforceable under section 365(f)(1).

The district court noted that other courts considering this issue have similarly refused to enforce profit-sharing provisions as anti-assignment provisions and that Antone failed to cite any decisions to the contrary. It rejected Antone's argument that this case is factually distinguishable from other cases invalidating profit-sharing provisions under section 365(f)(1).

The court also concluded that Antone mistakenly relied on cases involving the enforceability of rights of first refusal and cross-default provisions. The court explained that, unlike a profit-sharing provision, which extracts value from the estate, a right of first refusal could benefit the estate by creating a bidding war between potential purchasers. Moreover, the court noted, cases involving cross-default provisions are inapposite because they deal with provisions in one or more economically interdependent contracts, as distinguished from different provisions in a single contract.

In so ruling, the district court agreed with the reasoning in Great Atlantic, where the district court affirmed a ruling invalidating a profit-sharing provision under section 365(f)(1) as a matter of law. In Great Atlantic, the court rejected the landlord's argument that the profit-sharing provision should be enforced due to the parties' bargained-for exchange in resolving litigation over the debtor's prior defaults. The district court concluded that: (i) the landlord's interest had to yield to the policy interest of maximizing the value of the estate for the benefit of all creditors; and (ii) the bankruptcy court was not required to balance the equities, given the unenforceability of the profit-sharing provision as a matter of law.


Haggen Holdings is consistent with other rulings on the application of section 365(f)(1). The purpose of assumption and assignment of executory contracts and unexpired leases—maximization of value for the benefit of the bankruptcy estate and creditors—is a fundamental bankruptcy policy. Section 365(f)(1) accordingly is read broadly to render unenforceable a wide range of contract provisions that prohibit, restrict, or condition assignment.

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.

In association with
Related Topics
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