Adequate Assurance For Lease Assumption Doesn’t Require Guarantees

Under Section 365 of the Bankruptcy Code, a Debtor or Trustee may assume a nonresidential lease and may also assign the lease provided that lease is not in default or termed out. If the lease is in default, the default shall be cured and “adequate assurance” of future performance shall be provided to the landlord.

Adequate Assurance of Future Performance

“Adequate assurance of future performance” can be anything, but generally speaking, it may require a security deposit or increase of the security deposit to protect the landlord from defaults, guarantees, or such other security such as a letter of credit or certificate of deposit. Bottom line: the court has to find that the Debtor and/or assignee has the financial wherewithal to continue to perform under the lease for the remainder of the term. Now, of course litigation would arise if the landlord objects to such assignment on the basis that either the default has not been cured, be it monetary or non-monetary, or the adequate assurance of future performance is inadequate.

The “Shopping Center Exception” in Bankruptcy

There is a shopping center exception, however, as it relates to adequate assurance. The exception outlines more specific parameters:

• First, the financial condition, operating performance and source of rent shall be similar to that of the debtor and its guarantors at the time the lease was executed.
• Second, the percentage of rent due will not decline substantially.
• Third, all provisions such as radius, location, use or exclusivity shall remain the same and will not adversely affect the shopping center’s transactions with its lenders.
• Fourth, the assumption or assignment will not disrupt the tenant mix.

In addition, up to the time the court grants the assumption of the lease, the debtor or the trustee is required to perform fully under the lease. Further if the debtor or trustee cannot timely perform all of its obligations under the lease, the court may extend, for cause, the time for performance of any such obligation that arises within 60 days after the date the bankruptcy is filed, but the time for performance shall not be extended beyond such 60-day period.

Lease Assumption and Guarantees

So, to what extent does a lease assumption require guarantees when one was not initially required?

In In re Broadway Realty I Co. LLC, No. 25-11050 (Bankr. S.D.N.Y. Jan. 19, 2026), the debtor sought to confirm a Chapter 11 plan involving 5,000 apartment units located on 80 properties where there were hundreds of housing violations. Tenant groups and the City of New York opposed confirmation.

The debtor asserted that 80% of the units were in compliance with housing code and that it would not increase rents to comply with the City’s rent stabilization laws. The plan provided a third party would acquire the 80 properties and the leases were to then be assumed and assigned. The buyer/assignee was: (a) offering to substantially reduce the debt and stabilize the financial condition of the 80 properties, and (b) offering to spend $30 million to improve the properties including $10 million to address the code provisions. Further, the lender was providing a $3 million line of credit.

There was an issue as to whether the New York Housing Code violations constituted a default. For purposes of his ruling the bankruptcy judge assumed that the defaults existed, including breaches of the warranty of habitability or other similar lease terms or implied provisions.

The bankruptcy judge then noted that the phrase “adequate assurance” is “inexact, almost surely intentionally so,” and that there is no general definition of the term. Rather, he said that the phrase bends to the facts and circumstances of the case.

Secondly, the judge noted the Bankruptcy Code only requires the buyer to provide “adequate assurance,” not a guarantee that the housing violations will be cured after closing and that the buyer’s remediation plan met the Bankruptcy Code requirements of adequate assurance.

Thirdly, the judge noted that binding guarantees and binding schedules requested by the objecting parties were in excess of what the Bankruptcy Code required.

After taking everything into account, the Chapter 11 plan was confirmed, based upon the findings that the offer of adequate assurance of future performance had been satisfied and that guarantees were not required.

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