Rejecting an unexpired lease in bankruptcy lets a debtor or trustee walk away from a rental or equipment-lease obligation that the estate can’t afford to keep. The authority sits in 11 U.S.C. § 365, which allows the debtor in possession or trustee, with court approval, to reject the agreement and convert whatever the other side has left to collect into a capped general unsecured claim.1Office of the Law Revision Counsel. 11 U.S.C. 365 – Executory Contracts and Unexpired Leases The lease is treated as breached, not terminated, and the landlord or lessor steps to the back of the payment line with everyone else holding unsecured paper.
Which Leases Can Be Rejected
A lease is eligible for rejection only if it is both unexpired and executory. Both sides must still owe meaningful performance: the tenant owes rent, the landlord owes continued access. If either side has fully performed, or the lease expired or was lawfully terminated before the filing, there is nothing to reject.
The category is broad. Commercial real property, residential apartments where the debtor is the tenant, and personal property leases like copiers, vehicles, or industrial equipment all qualify. The chapter of bankruptcy does not restrict which types can be rejected, though it changes the deadlines and some procedural rules.
True Lease or Disguised Financing
Before anything else, the court may need to decide whether the document is actually a lease. A true lease involves periodic payments for temporary use of property that returns to the owner. A disguised financing arrangement typically ends with the debtor owning the asset or exercising a bargain-purchase option. Courts look at the economic reality, not the title on the page. If the transaction is really a secured loan, § 365 does not apply and the creditor holds a security interest instead of a lessor’s claim.
Bankruptcy-Triggered Termination Clauses Don’t Work
Many commercial leases include language that purports to end the agreement automatically if the tenant files bankruptcy. These ipso facto clauses are unenforceable. Under § 365(e)(1), a lease cannot be terminated or modified solely because the debtor filed, became insolvent, or had a trustee appointed.1Office of the Law Revision Counsel. 11 U.S.C. 365 – Executory Contracts and Unexpired Leases The choice of whether to keep or shed the lease stays with the debtor.
What the Court Looks At
Rejection requires court approval under § 365(a).2Office of the Law Revision Counsel. 11 U.S.C. 365 – Executory Contracts and Unexpired Leases Judges apply the business judgment rule, asking whether the decision was made in good faith and serves a rational business purpose, not whether it is the best possible move. The bar is low. If the lease is bleeding cash the estate can’t sustain, rejection is almost always approved. A landlord or other objector carries the burden of showing bad faith or that rejection clearly damages the estate, and courts rarely second-guess the debtor on which obligations help and which hurt.
The main reason a debtor might not reject is that assumption under § 365(b) requires curing existing defaults, compensating the counterparty for losses from those defaults, and giving adequate assurance of future performance.3Office of the Law Revision Counsel. 11 U.S.C. 365 – Executory Contracts and Unexpired Leases A debtor months behind on rent with no cash often can’t meet that burden, which pushes rejection from preference to necessity.
Deadlines by Chapter and Property Type
Bankruptcy law sets strict timelines so landlords and lessors are not left waiting indefinitely.
Chapter 7
In a Chapter 7 case, the trustee has 60 days from the order for relief to assume or reject any unexpired lease. If the court has not entered an order approving assumption by day 60, the lease is rejected automatically on day 61, even if a motion was filed and simply never ruled on.4U.S. Department of Justice. Civil Resource Manual 60 – Executory Contracts in Bankruptcy, Assumption and Rejection The court can extend the period, but only through an order entered before the original 60 days run out.
Nonresidential Real Property in Chapter 11
Commercial real estate leases in Chapter 11 face the tightest clock. Under § 365(d)(4), the debtor must decide by the earlier of 120 days after the order for relief or the date a plan is confirmed.5Office of the Law Revision Counsel. 11 U.S.C. 365 – Executory Contracts and Unexpired Leases The court can grant one extension of up to 90 days for cause. Anything beyond that requires the landlord’s written consent. Miss the deadline and the lease is deemed rejected, with immediate surrender required.
Everything Else
Residential leases and personal property leases in Chapters 9, 11, 12, and 13 run on a looser schedule. Under § 365(d)(2), the debtor may assume or reject at any time before plan confirmation.3Office of the Law Revision Counsel. 11 U.S.C. 365 – Executory Contracts and Unexpired Leases That open window closes fast when a party asks the court to set a deadline, which courts routinely do when the delay is prejudicing someone.
Paying Rent While the Decision Is Pending
A debtor cannot just stop paying while deciding. Section 365(d)(3) requires the debtor to timely perform all obligations on a nonresidential real property lease from the order for relief until the lease is assumed or rejected, including rent, insurance, and other contractual duties.3Office of the Law Revision Counsel. 11 U.S.C. 365 – Executory Contracts and Unexpired Leases The court can extend performance for obligations arising within the first 60 days, but not past that point. A landlord’s acceptance of these payments waives nothing.
For personal property leases in Chapter 11, § 365(d)(5) imposes a similar duty, but the clock starts 60 days after the order for relief, giving the debtor an initial window before full performance is required.6Office of the Law Revision Counsel. 11 U.S. Code 365 – Executory Contracts and Unexpired Leases This covers business equipment and similar commercial items, not household goods.
If the debtor stays in the space after filing and before rejection takes effect, the landlord may be entitled to an administrative expense claim for that gap. Courts generally presume contract rent equals fair rental value when calculating the amount, though the debtor can try to show the estate’s actual benefit was lower. Administrative claims get paid ahead of general unsecured claims, so running up time between filing and surrender has a cost.
What Rejection Actually Does
Rejection is treated as a breach of the lease occurring immediately before the petition date. It does not terminate the lease.3Office of the Law Revision Counsel. 11 U.S.C. 365 – Executory Contracts and Unexpired Leases That distinction has practical consequences. The landlord’s remedy is a damages claim; the lease’s terms still govern how those damages are calculated and what rights survive.
One significant consequence sits with subtenants. If the debtor was a master tenant who subleased space, rejecting the master lease does not automatically evict the subtenants. Courts have consistently read rejection-as-breach to preserve subleasehold interests, though whether a subtenant can practically stay depends on the sublease terms and what the subtenant wants.
The Landlord’s Claim and the Section 502(b)(6) Cap
Because rejection is backdated as a pre-petition breach, the counterparty’s future-damages claim slots in as a general unsecured claim. That is the lowest priority. Landlords and lessors typically recover cents on the dollar alongside trade creditors.
Congress capped how large that claim can get. Under § 502(b)(6), a real property landlord’s allowable claim for future rent is limited to the rent reserved, without acceleration, for the greater of one year or 15 percent of the remaining lease term, with the 15-percent calculation capped at three years. The remaining term is measured from the earlier of the petition date or the date the landlord repossessed. Any unpaid rent that accrued before that earlier date is added on top of the capped amount.7Office of the Law Revision Counsel. 11 U.S.C. 502 – Allowance of Claims or Interests The cap restricts only the forward-looking component.
Filing the Motion
Rejection starts with a motion filed in the bankruptcy court. The motion identifies the lease, explains why rejection benefits the estate, and asks the court to authorize it. Under Federal Rule of Bankruptcy Procedure 6006, the debtor must serve notice on the lease counterparty, any other parties in interest the court directs, and, outside Chapter 9 cases, the United States Trustee.8Legal Information Institute. Federal Rules of Bankruptcy Procedure Rule 6006 – Assuming, Rejecting, or Assigning an Executory Contract or Unexpired Lease Required notice periods come from the Federal Rules and local court rules, which vary by district.
If no objection is filed, many courts grant the motion without a hearing. An objection triggers a hearing where the parties argue whether rejection meets the business judgment test. Rejection becomes effective when the judge signs the order. Courts have equitable authority to make rejection retroactive to the motion filing date, particularly when the debtor had already vacated and the counterparty had notice. Backdating matters because every day between the motion and the order can generate administrative expense exposure.
Once the order is entered, the debtor must promptly surrender the property. Delay after approval only piles on administrative claims that reduce what is left for other creditors.
When the Debtor Is the Landlord
Everything above assumes the debtor is the tenant. The analysis flips when the debtor is the landlord on a real property lease. Section 365(h) gives the tenant a choice: treat the lease as terminated and walk away, or stay in possession for the balance of the term, including any renewal options enforceable under nonbankruptcy law.3Office of the Law Revision Counsel. 11 U.S.C. 365 – Executory Contracts and Unexpired Leases A tenant who stays keeps rights to possession, use, quiet enjoyment, and subletting, but loses the right to force the debtor-landlord to perform other obligations like maintenance. The tenant’s remedy for lost performance is to offset its value against rent, with no additional claim against the estate.