§ 102.4     Nonresidential Lease of Real Property
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 102.4, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Chapter 13 debtors—especially those engaged in business— occasionally have leases of nonresidential property. Though there is some disagreement in the case law, it is the majority view that the special provisions for unexpired leases of nonresidential real property in § 365(d)(3) and (d)(4) apply in Chapter 13 cases and require “timely perform[ance]” of the debtor’s lease obligations and assumption or rejection within 60 days after the petition, else the lease is deemed rejected and the debtor must immediately surrender the leasehold.1

[2]

Some Chapter 13 debtors have been caught off guard by application of § 365(d)(3) and (d)(4). For example, in In re Kirsch,2 the debtor leased space for a business but was not using the leased space at the petition. The debtor did nothing during the Chapter 13 case to reject the lease. The landlord eventually moved for allowance of an administrative expense for postpetition rent. The bankruptcy court held that the landlord was entitled to contract rent as an administrative expense from the petition until the lease was automatically rejected by § 365(d)(4).3 This 60 days of administrative rent was a substantial claim that the debtor had to pay in full to accomplish confirmation of a plan.4 The bankruptcy court pointed out that the debtor could have rejected the lease at the petition to avoid the administrative rent problem.

[3]

Some courts have been creative to avoid the automatic rejection of a Chapter 13 debtor’s nonresidential lease. For example, in In re Jennings,5 the court found that a Chapter 13 debtor could satisfy the requirement in § 365(d)(4) that the debtor assume the nonresidential lease within 60 days of the petition by sending the landlord a copy of the plan that included assuming the lease. However, because the debtor failed to send the landlord a copy of the plan and because the debtor did not obtain an extension of time under § 365(d)(4) within 60 days of the petition, the nonresidential lease was deemed rejected.6 Another court held that the debtor’s plan to assume a nonresidential lease filed 29 days after the petition satisfied § 365(d)(4) even though confirmation occurred after the 60-day period for assumption in § 365(d)(4).7 When the lessor invited the Chapter 13 debtor to cure rent arrearages notwithstanding the passage of more than 60 days after the petition, the lessor waived the automatic rejection mechanism in § 365(d)(4), and the nonresidential lease could be assumed in the plan.8 Reading § 365(d)(4) very technically, one court concluded that the section does not apply to a Chapter 13 debtor, and assumption or rejection of a nonresidential lease can be accomplished as part of the confirmation process under § 1322(b)(7) without regard to the time limits in § 365(d)(4).9

[4]

Chapter 13 debtors should not take chances with § 365(d)(3) or (d)(4). The debtor that wants to be shed of a nonresidential lease should not assume that prepetition abandonment or “termination” will preclude an administrative expense under § 365(d)(3)10—instead the debtor should move for rejection of the lease simultaneously with the filing of Chapter 13 petition. The debtor that wants to keep a nonresidential lease should clearly provide for assumption in the plan, and the plan should be served on the lessor within 60 days of the petition. If a confirmation hearing is not certain within 60 days of the petition, the safer route is to file a separate motion to assume with a request for an expedited hearing within the 60-day period. In a jurisdiction that delays confirmation,11 counsel may need to file a motion within 60 days of the petition to extend until confirmation the period for assumption of the nonresidential lease under § 365(d)(4).

[5]

A nonresidential lease of real property can be assumed, assigned or rejected through the Chapter 13 plan only if the lease did not expire before the petition.12 Chapter 13 debtors have fared no better than debtors under other chapters when the plan attempts to assume a lease that expired before the petition.13 When state law requirements for termination of a commercial lease were not satisfied before the petition, Chapter 13 debtors can exercise the power of assumption in § 365 and can cure defaults through the Chapter 13 plan.14


 

1  In re Kirsch, 242 B.R. 77, 79 (Bankr. M.D. Fla. 1999) (“Though Section 365(d) provides that the trustee is permitted to assume or reject unexpired leases, courts interpret the Bankruptcy Code as to allow chapter 13 debtors to assume or reject leases under this Section. . . . Accordingly, chapter 13 debtors must perform their obligations ‘under any unexpired lease of nonresidential real property, until such lease is assumed or rejected, notwithstanding section 503(b)(1) of this title.’ . . . The majority of courts interpreting Section 365 find that lessors of nonresidential real property . . . are entitled to payment of rent due under an unexpired lease as an administrative claim for the period running from the filing of the petition until the rejection of the lease. . . . Debtors’ lease with Regency did not expire until the lease was rejected by law in accordance with 11 U.S.C. § 365(d)(4) sixty days after Debtors filed their petition.”). Accord In re Slack, 280 B.R. 604 (Bankr. D.N.J. 2002) (Because debtor did not act to assume or reject, lease of commercial property was rejected automatically 60 days after the petition by § 365(d)(4), and the landlord’s claim for damages became a prepetition claim.); In re Aneiro, 72 B.R. 424 (Bankr. S.D. Cal. 1987); In re Dulan, 52 B.R. 739 (Bankr. C.D. Cal. 1985). Contra In re Dodd, 73 B.R. 67 (Bankr. E.D. Cal. 1987).

 

2  242 B.R. 77 (Bankr. M.D. Fla. 1999).

 

3  Accord In re Schnitz, 293 B.R. 7 (Bankr. W.D. Mo. 2003) (Applying § 365(d)(3), landlord gets administrative expense claim for postpetition, pre-rejection rent of business property without meeting the necessity and benefits test in § 503(b)(1)(A); debtor can pay the administrative rent claim pro rata with other priority claims over the life of the plan.).

 

4  See §§ 98.1 [ Plan Must Provide Full Payment ] § 73.1  Plan Must Provide Full Payment, 99.1 [ What Claims Are Priority Claims? ] § 73.2  What Claims Are Priority Claims? and 296.1 [ Leases and Executory Contracts ] § 136.10  Leases and Executory Contracts before BAPCPA.

 

5  204 B.R. 41 (Bankr. W.D. Mo. 1997).

 

6  204 B.R. at 44.

 

7  In re Aneiro, 72 B.R. 424 (Bankr. S.D. Cal. 1987). Accord In re Flugel, 197 B.R. 92, 94–96 (Bankr. S.D. Cal. 1996) (Requirement in § 365(d)(4) that nonresidential lease be assumed within 60 days of the order for relief is satisfied where plan filed by debtor within the 60-day period contains a provision assuming the lease. The motion required to assume a lease under Bankruptcy Rule 6006(a), according to the 1983 Advisory Committee Note, “‘does not apply . . . to the assumption or rejection of contracts in a plan pursuant to . . . § 1322(b)(7).’  . . . Under Section 365(d)(4) a lease will be deemed rejected unless it is assumed within 60 days of the order for relief. . . . [H]owever, a debtor need not actually obtain court approval within the 60 days. . . . In this case the actions of the Debtors effectively ended the uncertainty well within the 60-day period of section 365(d)(4). The Debtors declared their intention to assume the lease in their plan. The plan was filed with the petition. Within nine days [the landlord] was served with the 341 Notice which included specific notice that the Debtors intended to assume the lease. . . . [The landlord] was afforded the safeguards which would have been afforded under Rule 6006(a) and 9014. This Court holds that the assumption provisions in the plan, together with the 341 Notice, satisfied the requirements of Section 365(d)(4).”).

 

8  In re Dulan, 52 B.R. 739 (Bankr. C.D. Cal. 1985). See also In re Im, 256 B.R. 437 (Bankr. E.D. Pa. 2000) (Although lease of shopping center space was not in writing, was a tenancy at will under Pennsylvania law and was terminated before the petition, the landlord was estopped from denying the existence of a five-year lease because the debtor proved that he had invested $60,000 in the property in reliance on the landlord’s promise of a five-year lease. Debtor could assume the lease, and landlord was not entitled to relief from the stay.).

 

9  In re Dodd, 73 B.R. 67 (Bankr. E.D. Cal. 1987).

 

10  See, e.g., In re Smith, 249 B.R. 328 (Bankr. S.D. Ga. 2000) (Prepetition abandonment of leased commercial space was not effective to surrender the property for purposes of calculating a landlord’s claim in a Chapter 13 case.).

 

11  See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1  Timing of Hearing on Confirmation before BAPCPA.

 

12  See § 172.1 [ Debtor Can Assume, Assign or Reject Executory Contracts ] § 102.1  Debtor Can Assume, Assign or Reject Executory Contracts for discussion of same issue with respect to residential leases.

 

13  See, e.g., In re Pena, No. 03-82887, 2003 WL 22917353 (Bankr. C.D. Ill. Dec. 3, 2003) (unpublished) (Because restaurant property lease was a hold-over tenancy for one year that expired a few months after the petition, plan that assumes the lease and cures default over 45 months cannot be confirmed.); In re Foote, 277 B.R. 393 (Bankr. E.D. Ark. 2002) (Applying Arkansas law, sublease was terminated five months before bankruptcy when sublessor gave the debtor notice to quit; no interest remained to be assumed through the Chapter 13 plan, and automatic stay was not applicable.).

 

14  See, e.g., In re Zerance, No. 1-02-04784, 2003 WL 261704 (Bankr. M.D. Pa. Feb. 6, 2003) (unpublished) (Because debtor was still in possession of commercial property at the petition and the state law period for curing lease defaults had not expired, lease was not terminated by posting of writ of possession and lease could be assumed through Chapter 13 plan; proposed plan did not satisfy the requirements for curing default, but debtor was permitted to amend plan to try to satisfy § 1327(b)(7) and § 365(b).).