Rejecting a Commercial Lease: 5 Rules That Cap the Landlord's Claim

A landlord holding a ten-year lease against a tenant in bankruptcy does not hold a claim for ten years of rent, whatever the lease says about acceleration, and whatever the landlord's lawyer wrote in the demand letter before the petition. Congress settled the size of that claim with a formula, and the formula sits in the Bankruptcy Code provision numbered 502(b)(6), which disallows a lessor's claim for damages from the termination of a real property lease to the extent it exceeds a ceiling built from the lease's own rent.

Five rules produce that ceiling and fix its reach. The first explains why the claim is an ordinary one; the next three do the arithmetic; the last marks where the cap stops.

1. Rejection Is Treated as a Breach on the Eve of the Petition

Under Section 365(g)(1), the rejection of an unexpired lease that was never assumed "constitutes a breach of such contract or lease ... immediately before the date of the filing of the petition." Section 502(g)(1) then says the resulting claim is allowed or disallowed "the same as if such claim had arisen before the date of the filing of the petition."

Those two sentences move the landlord from the front of the room to the middle of it. A rejection claim is a general unsecured claim, paid if at all from what is left after secured creditors, administrative expenses, and priority claims. It does not matter that the rejection happened months into the case. The law dates the breach to the day before the filing, and the landlord waits with the suppliers.

2. The Cap Is the Greater of One Year or 15 Percent of the Remaining Term, Never More Than Three Years

The statute limits the claim to "the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease." The sentence is compressed enough that it repays being worked through with numbers, and the numbers below are hypothetical, chosen with level rent so that the arithmetic stays clean.

Take a lease at $10,000 a month with ten years remaining. One year of rent is $120,000. Fifteen percent of a ten-year remaining term is eighteen months, or $180,000. The greater figure governs, so the cap is $180,000, although the rent the tenant promised for the rest of the term was $1,200,000.

Shorten the remaining term to four years. Fifteen percent of four years is a little over seven months, which is less than a year, so the one-year floor controls and the cap is $120,000. Lengthen it to thirty years. Fifteen percent is four and a half years, which the statute will not allow, and the cap stops at three years, or $360,000.

A formula like this works the way the weight limit on a freight elevator in an older loft building works: the plate on the wall does not care what the tenant was carrying, only how much the car can take. The landlord's damages may be real and larger. The estate carries the plate's number.

Rent rarely stays level for a decade, and escalation clauses, percentage rent, and pass-through charges for taxes and common areas complicate the phrase "rent reserved" in ways that turn a clean calculation into a contested one. Which charges count as rent is, if we are being exact about it, the question that most disputes over the cap are about, more than the percentages themselves. That argument belongs to counsel with the lease in hand. The owner can at least see the shape of it here, and see that the headline number in a landlord's proof of claim is where the analysis begins.

3. The Clock Starts at the Petition or the Surrender, Whichever Came First

The one-year or 15 percent period runs "following the earlier of" the petition date and "the date on which such lessor repossessed, or the lessee surrendered, the leased property." A tenant that handed back the keys in January and filed in June has its cap measured from January.

That choice of starting date looks technical. It is also a reason to document a surrender with care, because the date on the surrender letter can become the date from which the landlord's claim is measured, and a surrender date that nobody wrote down is a fact someone will later have to prove.

4. Rent Already Past Due Is Added, but Acceleration Is Not

To the capped amount the statute adds "any unpaid rent due under such lease, without acceleration, on the earlier of such dates." The phrase "without acceleration" appears twice in the paragraph, and it does the same work both times. A clause that makes the entire balance of the term due on default does not enlarge the claim; only rent that had actually come due by the starting date is added on top.

In the ten-year example, if the tenant owed three months of rent when it filed, the allowable claim would be $180,000 plus $30,000. The landlord may argue for more (a landlord holding a state-court judgment for the accelerated balance will say the judgment fixes the number), but the formula is the measure the Code applies to a claim against the estate.

And the landlord's lawyer knows this before the owner does.

5. The Cap Reaches Only Termination Damages Under a True Lease of Real Property

Section 502(b)(6) applies to "damages resulting from the termination of a lease of real property." Three limits follow from those words, and each one sends an owner to a different part of the Code. The legislative history noted on the Cornell page reads the phrase as reaching only a true or bona fide lease, not a financing arrangement dressed as one. Equipment leases are not real property at all. And rent for the months the debtor actually occupied the space after filing is not a termination damage; Section 365(d)(3) requires the debtor to perform those obligations as they arise, and they are handled outside the cap.

The cap also limits the landlord's claim against the tenant's bankruptcy estate. On the landlord's separate claim against an owner who signed a personal guaranty, the text is silent, and the owner needs a lawyer's reading of the guaranty and of the case law in that circuit.

Section 502(b)(7) applies a parallel one-year formula to an employee's claim for damages from the termination of an employment contract, which suggests the drafters regarded both kinds of long commitment the same way: real, compensable, and not permitted to consume an estate that other creditors share.

What a Settlement Review Can and Cannot Do Here

Delancey Street settles merchant cash advance and similar business debt, and because the company is not a law firm, rejection motions and proofs of claim are work for bankruptcy counsel, whom an owner weighing a rejection needs anyway. Where the lease problem sits beside merchant cash advance debt that is taking the rent money each morning, the company's confidential first review, offered without charge, looks at that debt, with outside lawyers, licensed on their own account, handling anything that becomes a legal question.

The formula in Section 502(b)(6) is one of the few places where the Code tells a creditor, in advance and in numbers, how much of its loss the other creditors will be asked to share. Most losses in a failed business are never priced that plainly.