Commercial Lease in Bankruptcy: 6 Deadlines to Assume or Reject Under §365(d)(4)

When your business files bankruptcy, you must assume or reject the store lease within 120 days of filing or by confirmation of a plan if that happens earlier. Otherwise the lease is deemed rejected, and you have to hand the keys back to the landlord. One 90-day extension is possible, for a total max time of 210 days unless the landlord agrees to something else.

There are three possible solutions under court supervision.

• You can assume the lease and keep the space under its terms.
• You can assume it and sell it to someone else for something of value.
• Or you can reject it and give the space back.

The Assumption/rejection Timeframe

When determining when your 120 days are up, the countdown starts on the day you file your bankruptcy petition. That’s considered your “order for relief.” If a plan is confirmed before the 120-day limit is up, that sets the deadline as confirmation day.

When tenants ask, the court can give a one-time extension of 90 days for cause. That means the tenant must provide good reasons for needing the extra time. That extension has to be requested before the initial 120-day limit runs out. After that, only the landlord’s written consent can push the deadline out, so a max of 210 days may elapse.

The 210-day cap began with the 2005 reform. Before that, tenants had 60 days, and judges routinely let them stretch that out. But landlords wanted more certainty and firm deadlines. That deadline matters because it forces an early, and possibly costly, decision on something that could be vital to a Chapter 11 reorganization: store and office space. The forced decision is especially costly for retailers and other companies that rely on leased space. Back in 2021, a COVID relief law briefly made the first period 210 days. That expired December 27, 2022, except in Subchapter V small-business cases filed before then.

In some courts, just filing a motion to assume won’t do the trick. Before the deadline passes, the judge has to sign an order approving assumption, and that can take time. So be sure to factor in enough time for the court to get this done in the assumption/rejection timeframe.

While you’re deciding whether to keep the lease, you have to keep paying all normal rents and other obligations on time. The court has the power to postpone some obligations until as many as 60 days after filing. Day 60 is firm.

If you want to keep a lease that’s already been breached, you have to show the judge you’ve cured the default or assured the landlord of a cure; compensate them for actual losses; and show the landlord you can make good in the future. You cannot revive a lease terminated before filing.

Assumed Leases Can Be Sold

If you keep a lease within the 210-day window, you can assign it to a purchaser later, even after the time limit’s passed. That was the conclusion in Eastman Kodak’s 2013 bankruptcy case in the New York bankruptcy court. There, it took nearly a year before the company decided to assign a lease to a buyer of assets from the estate. The landlord tried to block the transfer, saying Kodak couldn’t do that after the 210-day limit, but the judge ruled they could. Assumed leases can be sold, despite a “no assignment” clause that says you have to get the landlord’s OK. The landlord can demand guarantees of good performance. Kodak is an important decision, but it’s a single court decision that others may not follow.

Rejecting, on the other hand, is costly. When a business rejects its retail lease, the landlord gets to claim future rent as a loss, with a special cap that limits what they can collect: the greater of one year’s rent or 15 percent of whatever was left on the lease, to a max of three years. To that, tack on unpaid rent already due at filing.

By deciding too soon that a lease should be assumed, tenants risk committing to an obligation they’re not able to honor. If they eventually decide to walk away from the lease, the landlord gets a priority claim for up to two years of rent. The rest of the landlord’s claim becomes a limited ordinary unsecured claim. Before 2005, landlords got treated as priority creditors, and likely without a cap on claims. The two-year limit softens the risk of deciding prematurely to keep the lease.

Keep a close eye on the dates.

• When you file, the countdown begins.
• After day 60, no more rent deferrals.
• Assume or reject by day 120, or sooner if plan confirmed.
• 90-day extension one-time for cause gets to day 210.
• Later only with landlord consent.

Plan ahead to manage this decision. The more leases you have, the more critical it is to plan the issue before filing. If you file knowing a lease decision you have to make will be left hanging, the 210-day limit might come back to haunt you.