The Bankruptcy Abuse Prevention and Consumer Protection Act (the “Act”) became effective on October 17, 2005. So how does the Act affect the real estate industry? One way involves the time limits for a debtor to assume or reject non-residential real property leases. Specifically, Section 404 of the Act makes changes to the rules governing the time a debtor has to assume or reject an unexpired commercial lease. Because a commercial landlord is often the largest unsecured creditor in a Chapter 11 bankruptcy, revisions to the rules governing the assumption or rejection of leases will have a big impact on landlords as well as debtor-in-possession lenders.
Before the Act, a Chapter 11 debtor who was a tenant under one or more commercial leases was required to assume or reject those leases within 60 days of filing bankruptcy. However, the Bankruptcy Code permitted a debtor to obtain extensions from the Court to make this decision even if the landlord objected. These extensions have, in the past, been liberally granted. Moreover, debtors would often obtain serial extensions, permitted them to defer the decision to assume or reject the commercial lease until it was time to confirm the plan of reorganization (so long as the debtor was current on post-petition rent).
Now, in all Chapter 11 bankruptcies that are filed on or after October 17, 2005, the debtor will have 120 days after the filing of its petition to assume or reject any commercial leases. The debtor may only obtain a single 90 day extension of that deadline, and only if the extension is obtained during the pendency of the initial 120 day period. Extensions beyond the combined maximum 210 days period are available to the debtor only with the prior written consent of the landlord. Unless the lease is assumed or such extensions are obtained, the lease is deemed rejected as a matter of law, and the debtor is required to vacate the premises.
In addition, if a debtor subsequently rejects a previously assumed lease, the Act now gives a landlord’s claim for breach of the rejected lease administrative priority status. As such, for a period of two years from the rejection date, the amounts due under the lease must be paid on par with other post-petition obligations of the debtor, and before payments can be made to any pre-petition unsecured obligations. Further, the landlord is entitled to payment of the remaining balance due under the now rejected lease as an unsecured, capped claim.
Any questions about the Act and how it affects the real estate industry can be directed to either Patrick J. Keating, Practice Group Leader of the Creditors Rights and Bankruptcy Practice Group at Buckingham, Doolittle & Burroughs, LLP or John P. Slagter, Practice Group Leader of the Real Estate & Construction Practice Group.