If the debtor-tenant seeks to terminate and surrender the lease, that is “reject it”, the landlord may be entitled to a “rejection damage” claim.  A landlord is not entitled to the full amount of unpaid obligations for the balance of the lease.  Instead, Section 502(b)(6) limits the recovery a landlord may receive for “rejection damages.” Under Section 502(b)(6) of the Bankruptcy Code, the landlord is entitled to rent due under the rejected lease for the greater of (i.) one year’s rent, or (ii.)  fifteen percent (15%) of the rent due under the lease, not to exceed three years’ rent.  Unlike the administrative rent claim, a rejection damage claim is a general non-priority unsecured claim paid only after all other claims.

The landlord’s rejection damage claim is capped under Section 502(2)(b)(6), but the landlord is entitled to include all amounts that constitute “rent” under the lease.  Items that may include “rent” include utility fees, common area maintenance charges and taxes.

The Bankruptcy Code views a rejected lease as one that is in breach by the tenant.  To preserve its rejection damage claim, the landlord needs to prepare and file a proof of claim.  This differs from the procedure for administrative rent claims, which generally requires the landlord to file a motion for allowance and payment of the administrative rent claim.  Once the rejection damage claim is properly filed with the court, the claim is deemed allowed unless the debtor-tenant, or another interested party, files an objection to the claim.  Only claims that are “allowed” are eligible for payment, and again, only if funds are available.

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.