Assumption or Rejection of Unexpired Leases in Bankruptcy

When a bankruptcy case is filed, any lease still in force on the filing date becomes an asset the debtor (or the trustee) has to decide about. Under 11 U.S.C. § 365, the assumption or rejection of unexpired leases in bankruptcy is the mechanism for that decision: assume the lease and keep it on its existing terms, or reject it and treat it as a breached contract the estate walks away from.¹ The choice is time-limited, requires court approval, and carries different consequences depending on the chapter filed and the kind of property involved.

What Assumption and Rejection Actually Mean

Assumption keeps the lease alive. The debtor agrees to perform going forward under the same terms, and the estate becomes bound to the deal. Rejection is the opposite: the estate treats the lease as broken. The debtor gives up possession, and the landlord or lessor is left with a damages claim that gets filed against the estate like any other creditor’s claim.

Neither option is automatic in the sense of being free. Assumption forces the debtor to fix everything that is wrong with the lease before the court will approve it. Rejection creates a claim the estate has to account for, though the Code caps how much a landlord can collect.

Which Leases § 365 Covers

Section 365 applies only to leases that were still in effect on the petition date and that are “executory,” meaning both sides still owe meaningful performance. A tenant who still owes rent and a landlord who still owes possession are both performing, so that lease is executory. If a court had already entered a final judgment terminating the lease before filing, or if one side had already finished everything required of it, there is nothing left to assume or reject.¹

The rule reaches broadly: apartment and house leases, commercial storefronts and offices, and personal property leases for vehicles, equipment, or machinery all qualify. The label on the paperwork does not decide it; the ongoing obligations do.

One boundary worth stating up front: a lease clause that purports to terminate the agreement automatically on a bankruptcy filing (an “ipso facto” clause) is unenforceable. Section 365(e)(1) prevents a landlord from ending or modifying a lease solely because the debtor became insolvent, filed a case, or had a trustee appointed.¹ The debtor gets the chance to decide.

Deadlines to Assume or Reject

Missing the deadline is not a delay; it is a decision. The Code deems the lease rejected by operation of law when the clock runs out, and the debtor loses the property with no further hearing.

Chapter 7

In a Chapter 7 liquidation, the trustee has 60 days after the order for relief to assume or reject an unexpired lease of residential real property or personal property. The court can extend that window for cause, but the request must come before the 60 days run out. Otherwise the lease is deemed rejected.¹

Chapters 9, 11, 12, and 13

In reorganization cases, the debtor has until the court confirms a plan to assume or reject a lease of residential real property or personal property. That window is long, but not open-ended: any party to the lease can ask the court to set a shorter deadline and force the decision sooner.¹

Nonresidential Real Property

Commercial real estate leases operate on a tighter clock. Under § 365(d)(4), a nonresidential real property lease is deemed rejected unless it is assumed or rejected by the earlier of 120 days after the order for relief or the date the court confirms a plan. The court can extend the period by 90 days for cause. Any further extension requires the landlord’s written consent. If the deadline passes with no action, the debtor must immediately surrender the property.¹

Bankruptcy courts enforce this one strictly. A retail or office-based debtor should treat 120 days as a hard planning constraint, not an aspiration.

Rent While the Decision Is Pending

Until a nonresidential real property lease is formally assumed or rejected, the debtor has to keep paying. Section 365(d)(3) requires the debtor or trustee to timely perform all obligations arising after the order for relief, rent included. The court can grant a brief extension on obligations arising within the first 60 days, but not beyond that period.²

Debtors who assume they can occupy the space rent-free while restructuring learn otherwise fast. Falling behind on post-petition rent hands the landlord ammunition to seek relief from the automatic stay or oppose assumption of the lease.

What It Takes to Assume a Lease

If the lease is not in default, assumption is straightforward: file the motion, get the order, keep performing. If there has been a default, the debtor has to satisfy three requirements before the court will approve assumption.

First, cure the default (or provide adequate assurance of a prompt cure). That means paying every dollar of back rent, late fees, and other amounts owed. Miscalculating the cure amount is one of the most common reasons assumption motions get denied. Section 365(b)(2) carves out an exception: defaults arising solely from the debtor’s insolvency, the bankruptcy filing itself, or the appointment of a trustee do not need to be cured, and neither do penalty-rate provisions triggered by failure to perform nonmonetary obligations.¹

Second, compensate the landlord for any actual financial loss from the default. Emergency maintenance the tenant should have handled, legal costs incurred chasing unpaid rent — those figures factor into the assumption cost.

Third, provide adequate assurance of future performance. Courts want to see bank statements, income projections, operating budgets, and any restructured financial plans showing the debtor can cover the payments going forward. For a commercial debtor, that means demonstrating a viable post-bankruptcy revenue stream. Without this showing, courts routinely deny assumption motions, because keeping a lease the debtor cannot afford helps no one.¹

How Rejection Is Evaluated

Rejection is easier to obtain. Courts apply a “business judgment” standard, asking whether walking away from the lease reflects a reasonable determination that benefits the estate. If rejecting plausibly helps the reorganization or reduces losses, the motion is generally granted. Landlord objections rarely succeed unless the debtor’s reasoning is irrational or the motion is filed in bad faith.

The Landlord’s Damages Claim

Rejection treats the lease as breached, so the landlord has a claim for damages. Section 502(b)(6) caps that claim at the greater of one year’s rent or 15 percent of the remaining lease term (not to exceed three years), plus any unpaid rent already due when the petition was filed or when the landlord repossessed the property.³ Without the cap, landlords holding long-term leases would swallow most of what unsecured creditors would otherwise share.

Rejection damages are treated as a general unsecured claim, so the landlord stands in line with other unsecured creditors and typically recovers pennies on the dollar.⁴ Post-petition rent that accrued before formal rejection is different: it may qualify as an administrative expense with a higher priority. The distinction matters when the estate has limited funds.

Filing the Motion

The formal process starts when the debtor files a motion stating whether the lease will be assumed or rejected. The motion has to be served on the landlord, any other party with an interest, and the trustee if one has been appointed. Local rules govern the objection period.

If an objection is filed, the court schedules a hearing where both sides present evidence and the judge rules. If no one objects, many courts grant the motion without a hearing. Either way, the process concludes only when the judge signs an order.¹

Compliance with the order is immediate. A debtor who rejected must vacate the premises or return the equipment by the date specified. A debtor who assumed must pay the cure amount and continue regular payments. Noncompliance can lead the court to lift the automatic stay so the landlord can pursue eviction or repossession outside the bankruptcy case.

Assigning the Lease to a Third Party

Sometimes the debtor does not want to keep the lease but recognizes it has value to someone else. Under § 365(f), the debtor can assume a lease and immediately assign it to a third party, even if the lease contains an anti-assignment clause. The Code overrides those provisions the same way it overrides ipso facto clauses.¹

Assignment takes two things. The debtor must first assume the lease (curing defaults and providing adequate assurance), and the proposed assignee must independently demonstrate adequate assurance of future performance. There are exceptions: if applicable law excuses the non-debtor party from accepting performance by a stranger and the landlord does not consent, assignment can be blocked. Contracts to make loans or extend financing also cannot be assigned over objection.¹

Shopping Center Leases

Leases in shopping centers carry heightened requirements for both assumption and assignment because a shopping center depends on a particular tenant mix and rent structure. Under § 365(b)(3), “adequate assurance of future performance” for these leases specifically requires:

The debtor or assignee must demonstrate the source of rent and other payments due under the lease.
Any percentage rent tied to the tenant’s sales cannot decline substantially.
The assumption or assignment must honor every provision of the lease, including radius clauses, use restrictions, location requirements, and exclusivity provisions, and cannot breach similar provisions in other leases or financing agreements tied to the center.
The assumption or assignment cannot disrupt the tenant mix or balance of the shopping center.

These rules give shopping center landlords more leverage than landlords in other commercial contexts. If a debtor operated a bookstore and a proposed assignee wants to open a tattoo parlor, the landlord can argue the assignment would violate use restrictions and disrupt the tenant mix.¹ The landlord may also require the assignee to post a security deposit substantially the same as what would have been required of a new, similar tenant signing a fresh lease.

When the Landlord Is the Debtor

Everything above assumes the tenant filed the case. When the landlord is the debtor and rejects a lease, § 365(h) protects the tenant with a choice: treat the lease as terminated and file a damages claim, or stay.

A tenant who elects to remain keeps all rights under the lease for the balance of the term and any renewal periods enforceable under nonbankruptcy law, including possession, quiet enjoyment, subletting, and assignment. The tenant may offset against future rent the value of any damage caused by the landlord’s failure to perform its obligations after rejection.¹

The tradeoff: a tenant who stays gives up other remedies against the estate for post-rejection nonperformance and is limited to the rent offset.

Intellectual Property Licenses

The § 365 framework reaches beyond physical property. Under § 365(n), if a debtor-licensor rejects an intellectual property license, the licensee has the same basic choice as a tenant under § 365(h): treat the license as terminated, or retain the licensed rights for the remaining term. A licensee who elects to keep the rights must continue paying all royalties and gives up the right to setoff and any administrative expense claim. The licensee can also require the trustee to provide any embodiments of the intellectual property (source code, designs, formulas) that the trustee holds and refrain from interfering with the licensee’s rights.¹

For a business that depends on licensed software, patented processes, or trademarked brands, that protection is what keeps a licensor’s bankruptcy from instantly stripping away technology the licensee’s operations rely on.

1
Office of the Law Revision Counsel. 11 U.S.C. 365 – Executory Contracts and Unexpired Leases
2
Office of the Law Revision Counsel. 11 U.S. Code 365 – Executory Contracts and Unexpired Leases
3
Office of the Law Revision Counsel. 11 U.S.C. 502 – Allowance of Claims or Interests
4
Office of the Law Revision Counsel. 11 U.S. Code 507 – Priorities