What are the trustee's options when it
comes to the lease? In the event that a trustee
determines that a lease is a valuable asset of
the estate, the trustee can seek a court order
authorizing the assumption of the lease by
the debtor. Before the lease can be assumed,
the trustee must cure or assure that it will
promptly cure any defaults under the lease;
compensate the landlord for any lost income
sufered as a result of any default under the
lease; and provide "adequate assurance of
future performance" under the lease. Generally, evidence demonstrating a reasonable likelihood that the debtor will be able
to fulfll its fnancial obligations under the
lease will be sufcient to establish "adequate
assurance of future performance." A guarantee of future performance is not required.
Te trustee can also assume the lease and
assign it to a third party. Te assignee must
demonstrate that it has the ability to provide
adequate assurance of future performance
under the lease.
Lease clauses providing for lease termination
if the tenant files for bankruptcy are
unenforceable in bankruptcy.
Although many leases contain anti-assignment provisions, these are generally unenforceable in bankruptcy. Te assignment of
an assumed lease relieves the debtor's bankruptcy estate from any liability for any breach
of the lease that occurs afer the assignment.
Finally, the trustee may fnd that the lease
is burdensome to the estate — the rent is too
high or the space is no longer needed for the
debtor's business operations — and decide
to reject the lease. Rejection of the lease can
be accomplished by court order, following
notice and a hearing, on the trustee's motion
for authority to reject the lease. Rejection of
the lease can also occur by operation of law if
the trustee fails to assume or reject the lease
120 days afer the order for relief in the debtor's bankruptcy case or by any extension of
that deadline authorized by court order. Te
trustee is required to immediately surrender
possession of the leased premises upon rejection of the lease.
Rejection of the lease, either by court
order or by operation of law, is deemed to be
a breach of the lease immediately before the
date of the bankruptcy fling. In other words,
your claim against the debtor for damages
resulting from its breach of the lease will be
treated as a prepetition claim against the
debtor's bankruptcy estate.
Michael Zaverton is an associate with Walter & Haverfield in Cleveland experienced in
bankruptcy, creditor's rights, and commercial
litigation matters. Contact him at mzaverton@
walterhav.com.
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