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Bankruptcy Landlord Tenant Law Litigation

How to Avoid the Claim Cap Becoming a ‘Claim Trap’

Commercial landlords should consider the steps they can take when drafting and negotiating their commercial leases to minimize the adverse impact of the claim cap in the event of a tenant bankruptcy and ensuing lease rejection.

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When a tenant files for bankruptcy, the commercial landlord is faced with the often worrisome prospect that its unexpired lease may be rejected in the bankruptcy proceedings. A tenant’s right to reject a lease, and thereby disavow its future lease obligations, does not exist outside of bankruptcy and often plays a large role in its decision to file for bankruptcy. During the period that the debtor tenant is determining whether or not to assume a non-residential lease, the Bankruptcy Code requires it to timely perform the obligations under the lease which arise after the commencement of the bankruptcy case. See, 11 U.S.C. §365(d)(3)(A). However, that is not the case for lease obligations related to time periods occurring after a lease is rejected. The Bankruptcy Code creates a fiction that rejection of a lease, although effectuated post-petition, constitutes a breach which occurred immediately prior to the filing of the bankruptcy petition. See, 11 U.S.C. §365(g)(1).

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