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What does it mean when a debtor / commerical tenant "rejects a lease"?

What does it mean when a debtor / commerical tenant "rejects a lease"?

Full question:

What does it mean when a debtor / commerical tenant "rejects a lease"?

Category: Bankruptcy
Date: 04/07/2025
State: Minnesota

Answer:

Section 365 of the United States Bankruptcy Code allows a debtor, with the court’s approval, to assume or reject executory contracts and unexpired leases that are part of the bankruptcy estate. It is designed to give a reorganizing debtor an opportunity to withdraw from burdensome contractual obligations, while maintaining beneficial contracts. If a debtor assumes an unexpired lease, the landlord must continue leasing the affected property to the debtor. If the debtor rejects a lease, the rejection is treated as a breach of contract occurring immediately before the commencement of the bankruptcy case. Although rejection gives the property owner a claim against the debtor’s estate, this claim is not given any priority over those of unsecured creditors.

This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.

FAQs

What is the right of first refusal on a commercial lease?

The right of first refusal in a commercial lease gives the tenant the option to purchase the property before the landlord sells it to another party. This means the landlord must offer the tenant the chance to buy the property on the same terms as any third-party offer. If the tenant declines, the landlord can proceed with the sale. This right is often negotiated in the lease agreement and can provide tenants with a significant advantage in securing the property they occupy.

What happens when a lease is rejected?

When a lease is rejected by a debtor in bankruptcy, it is considered a breach of contract. This rejection allows the debtor to terminate the lease without further obligations. The landlord can file a claim against the debtor's bankruptcy estate for damages caused by the breach, but this claim is treated as a general unsecured claim, which may not be paid in full. The rejection typically takes effect immediately upon court approval.

What happens to your lease if your business fails?

If your business fails, the lease may be affected depending on your business structure and the terms of the lease. In bankruptcy, you can choose to reject the lease, which terminates your obligations under it. If you don't file for bankruptcy, you may still be liable for rent until the lease is formally terminated or assigned. It's important to review your lease terms and consult with a legal professional for specific guidance.

What is the best excuse to break a commercial lease?

The best excuse to break a commercial lease often depends on the lease terms and state laws. Common reasons include financial hardship, failure of the landlord to make necessary repairs, or significant changes in business circumstances. It's crucial to document any issues and communicate with the landlord. Always review your lease for any termination clauses and consider seeking legal advice before taking action.

What happens to a commercial lease if the business fails?

If a business fails, the commercial lease may be rejected in bankruptcy, which allows the debtor to terminate it. If not in bankruptcy, the tenant remains responsible for the lease obligations until it is formally terminated or assigned. The landlord may seek unpaid rent or damages. It's advisable to consult a legal professional to understand your rights and obligations under the lease.