Below is a post from Michael Temin, senior counsel with Fox Rothschild.
Bankruptcy Code § 365(d)(3) requires the trustee or the debtor in possession to “timely perform all the obligations of the debtor . . .arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1).” In 2001 the Third Circuit construed this section to require the debtor to perform the lease in accordance with its terms. CenterPoint Properties v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 268 F.3d 205 (3d Cir. 2001).
It held that “an obligation arises under a lease for the purposes of § 365(d)(3) when the legally enforceable duty to perform arises under the lease.” If the lease requires payment on the first of each month and the debtor files its petition in the middle of a month, Montgomery Ward obligated the estate to pay rent starting with the first day of the next month. It did not require payment of rent from the filing date until the first day of the next month (“stub rent”).
According to the debtor in Goody’s Family Clothing, that was the end of the inquiry. The circuit court in an opinion by Judge Ambro framed the inquiry as follows: “Does the existence of § 365(d)(3) preclude the attempted use of § 503(b)(1) for the “stub rent.”? If so, the inquiry ends there. If not, we must then determine whether the “stub rent” may be considered an administrative expense under § 503(b)(1).” It answered the first question “no” and the second question “yes.”
How did they get there? Section 503(b)(1) is specifically mentioned in § 365(d)(3) which states “notwithstanding section 503(b)(1).” Section 365(d)(3) does not supplant or preempt 503(b)(1). It gives additional rights to landlords. It does not take away any other rights they already had, i.e., the right to an administrative expense for use and occupancy if the debtor occupied leased premises postpetition. The court held that landlords may assert a § 503(b)(1) claim for “stub rent.”
The court next considered whether the debtors’ occupancy was an administrative expense. And determined that it was. Citing Calpine Corp. v. O’Brien Envtl. Energy, Inc. (In re O’Brien Envtl. Energy, Inc), 181 F.3d 527, 532-33 93d Cir. 1999) which cited Cramer v. Mammoth Mart, Inc. (In re Mammoth Mart, Inc.), 536 F.2d 950, 954 (1st Cir. 1976), the court stated that the debtor’s occupancy of the leased premises must confer an actual and necessary benefit to the debtor in the operation of its business. And the court said there could be no reasonable dispute that the occupation of the leased premises constituted a benefit since Goody’s obtained better than 105% of costs recovery from its store closing sales. The sales required a physical venue and remaining in the existing premises was just as necessary and beneficial to the estate as leasing new premises specifically for the store-closing sales.
In footnotes the court stated that the “stub rent” may or may not be tied to the actual lease rate and stated it was not deciding when payment must be made.