Once a tenant files for bankruptcy, it has three options regarding the lease:

  1. Assume the lease and continue performing all obligations, or
  2. Assume and assign the lease to a third party, or
  3. Reject the lease and surrender the premises and terminate performance.

Section 365 of the Bankruptcy Code gives the bankrupt tenant 120 days to decide if it will assume or reject the lease. During this period, the tenant can request one 90 day extension of time to decide whether to assume or reject. After the extension period expires, any further extensions require written consent from the landlord.

If the debtor-tenant fails to assume or reject the lease within the 120 day period, and no extension is granted, the lease is deemed rejected by operation of law. This is a significant provision for landlords and one of several reasons why landlords should stay fully informed as to the debtor-tenant’s intentions regarding its lease.

To be proactive, landlords (or their counsel) should review all pleadings filed in the tenant’s bankruptcy proceeding to see if the debtor-tenant sought an extension of time to assume or reject. Additionally, landlords should review the tenant’s motions to assume, motions to assume and assign, as well as motions to reject leases. The exhibits to these motions often contain schedules identifying the leases affected by the motion.

Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP.  Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.