A tenant in bankruptcy has the option to reject an unexpired lease. This can leave the landlord with a damage claim of uncertain value and little else to show for what started out as a valuable landlord/tenant relationship. The resulting disappointment can only be heightened if the landlord invested large sums in specialized tenant finish or if there are monthly mortgage payments due – without cash flow to pay them.

Small wonder, then, that a landlord would wish for the bankrupt tenant to assume the lease, even if the tenant’s rights are going to be assigned to a third party who is purchasing assets out of the tenant’s bankruptcy estate.

Indeed, the bankruptcy code lays down conditions that must be met in order for there to be an assumption and assignment. Defaults must be cured; “administrative rent” must be paid; a landlord is entitled to “adequate assurance” that the lease terms will be carried out in the future. There are additional “adequate assurances” to be provided in the case of a shopping center lease. Assumption and assignment may also serve up a good defense to any subsequent preference claim.

So what’s not to like about an assumption and assignment? The answer is, in two words, “cost” and “uncertainty.” A landlord trying to make the most of a proposed assumption and assignment is going to spend money on a lot of care and feeding issues in an environment that is oftentimes plagued with uncertainty. To be sure, there are plenty of assumption/assignment scenarios that are worth every penny paid in the chase, but there are also plenty of situations where a landlord would have been money ahead if the bankrupt tenant had simply rejected and terminated the lease.

So a landlord wishing for the lease to be assumed/assigned needs to know that the ensuing process is likely to be more expensive, drawn out and uncertain than the process of a quick rejection. And regardless of the landlord’s desires for a fresh, new rent-paying tenant, if the bankrupt tenant plans to assume and assign, or where the bankrupt tenant just can’t make up its mind, the landlord needs to pay close attention.

When the lease is promptly rejected and terminated, the landlord becomes entitled to possession of the leased premises, unfettered by the ongoing events in the tenant’s bankruptcy proceeding. In addition, the landlord may be entitled to a claim for “rejection damages” against the bankruptcy estate. While “rejection damages” are usually paid at the rate of pennies on the dollar, the claims process is not expensive and is likely to be recouped many times over in the event there is a modest distribution paid to general unsecured creditors. What the landlord does not get upon rejection (at least not out of the bankruptcy proceeding), is a rent-paying tenant.

Finally, remember that a landlord’s whose lease is rejected is becomes a mere “unsecured trade creditor”. Among other things, this means that the landlord may be subject to a claim by the tenant or its bankruptcy representative to recover as a bankruptcy preference or avoidable transfer one or more of the lease payments made or other consideration received by the landlord in the 90 day period prior to bankruptcy. The law of bankruptcy preferences and avoidable transfers is complex. Bankruptcy preference claims are subject to numerous potential defenses.