Can A Lease Terminated Under State Law Be Revived In the Tenant's Bankruptcy?
In these troubled times when lease and other contract defaults, as well as bankruptcies, abound, it may be useful to reexamine what happens to a lease of commercial real estate when it has been terminated in accordance with state law and the tenant thereafter files for bankruptcy protection before the eviction process is started or completed. This question is made even more topical by the Connecticut Supreme Court’s recent decision in Boccanfusco v. Daghoghi¸ 2020 WL 5823337 (Sept. 30, 2020), which undertakes a review and clarifies certain elements of the doctrine of equitable nonforfeiture under Connecticut law. As we will see, that doctrine plays an important role in how the lease will get treated in a tenant bankruptcy.
In general, when a commercial tenant files for bankruptcy protection under chapter 11, it will have a period of 120 days to decide whether to “assume” or “reject” “an unexpired lease of nonresidential real property,” subject to limited extensions of time to make that decision, first for a period of 90 days for “cause” and thereafter only with the landlord’s consent. 11 U.S.C. §365(d)(4)(A), (B). In order to assume an unexpired lease, the lessee must promptly cure all lease defaults, compensate the landlord for any damages caused thereby and provide adequate assurance of future performance under the lease. 11 U.S.C. §365(b)(1). If the lease is rejected, it will be considered to give rise to a prepetition (i.e. pre-bankruptcy) breach of contract claim, 11 U.S.C. §365(g)(1), which will be limited to the rent that would be due for the greater of one year or 15% of the remaining term of the lease, not to exceed three years, plus any unpaid rent of the bankruptcy filling date. 11 U.S.C. §502(b)(6).
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Pullman & Comley by Irve J. Goldman. Published October 28, 2020.