A lease or executory contract may be rejected by a debtor in bankruptcy.
The lease or contract is treated as terminated.
The claim or damages on a real estate lease are capped under the Bankruptcy Code.
The Bankruptcy Code limits damages on a landlord’s rejection claim to rent reserved (without acceleration) for greater of:
•one (1) year or
•15% (not to exceed three (3) years) plus
•any unpaid rent due
A Bank’s borrower/landlord may have a major lease rejected by a tenant. If the lease is “above market for the debtor” it will probably be rejected.
The consequences to the Bank may be significant. The rejection claim is an unsecured claim (unless there is a security deposit or letter of credit). The lease/contract rejection can significantly affect the value of the Bank’s collateral. Rejection by an anchor tenant could trigger a default under other leases. A sensitivity analysis must consider this risk.
Set forth below are two examples of claim calculations on a rejected lease:
