Commercial Real Estate Leases Under Section 365

Section 365(d)(3) timely post-petition rent, the Section 365(d)(4) 120-day plus 90-day deadline, and the Section 365(b)(3) shopping-center lease assumption requirements.

Home › Section 365 › Commercial Real Estate Leases

Overview

Commercial real property leases occupy a unique corner of § 365. Congress recognized that shopping-center and other commercial landlords carry tenant-specific operating costs they cannot easily redirect during bankruptcy — mortgage debt, common-area maintenance, utilities, insurance, and tax obligations are tied to occupancy. To prevent the bankruptcy estate from using free rent as a reorganization subsidy, Congress added three landlord-protective provisions:

Official citations: 11 U.S.C. § 365(d)(3); § 365(d)(4); § 365(b)(3).

Section 365(d)(3): timely post-petition rent

Section 365(d)(3) provides that the trustee or debtor in possession "shall timely perform all the obligations of the debtor . . . arising from and after the order for relief under any unexpired lease of nonresidential real property, until such lease is assumed or rejected." Two things are notable.

First, the obligation is to perform "timely" — meaning on the contract due date, not when the estate gets around to it. The most common § 365(d)(3) obligation is post-petition rent due on the first of the month; if the petition is filed on the second, rent for that month is typically still owed in full on the first of the following month under the contract.

Second, the obligation runs until assumption or rejection. There is no § 503(b) administrative-claim sequencing fight under § 365(d)(3); the obligation is direct and contractual. If the estate cannot pay rent, the appropriate response is to move to reject quickly, not to defer.

Stub-rent split. Courts split on the treatment of rent attributable to the petition month when the petition is filed mid-month and rent was due on the first. The "proration" approach treats the unpaid portion as an administrative claim under § 503(b)(1); the "billing date" approach holds that § 365(d)(3) only covers obligations whose due date follows the petition, leaving stub rent as a general unsecured claim. The Third Circuit's leading proration cases go one way; other circuits have come out differently. Counterparties typically argue proration; debtors typically argue billing date.

Section 365(d)(4): the 120-plus-90-day deadline

Section 365(d)(4)(A) imposes a hard deadline on the trustee or debtor in possession for nonresidential real property leases: the lease must be assumed or rejected by the earlier of (i) 120 days after the order for relief or (ii) the date the plan is confirmed. If the deadline passes without action, the lease is deemed rejected by operation of law, and the trustee must immediately surrender the premises.

Section 365(d)(4)(B) permits a single extension of up to 90 additional days, on the court's order for cause shown, prior to expiration of the initial 120-day period. After that one extension, any further extension requires the landlord's written consent. This is a meaningful constraint on multi-location retail and restaurant reorganizations — the maximum unilateral window is 210 days, period.

The 2005 BAPCPA change

Before BAPCPA, § 365(d)(4) allowed the court to extend the deadline indefinitely for cause. Multi-location retail debtors routinely obtained six- or twelve-month extensions to evaluate locations against a reorganization plan. Congress changed that in 2005 to give landlords a fixed outside horizon of 210 days. The practical effect on large retail reorganizations was immediate: the lease decision now drives the entire confirmation schedule, not the other way around.

Operational consequence

A trustee or debtor in possession that does not move to assume by Day 210 risks deemed rejection. The standard response in large retail cases is to (i) move to extend to the full 210 days at the outset, (ii) file omnibus motions categorizing locations as "go-forward" (intended to assume) versus "GOB" (going-out-of-business / intended to reject), and (iii) file timely lease-decision motions on every location before the deadline. A single missed location can trigger immediate surrender and an administrative claim for moving and re-leasing costs.

Conditional assumption. Many estates assume leases "subject to" the right to later assign or reject within a defined window in a plan or sale order. Section 365(f) generally permits assignment notwithstanding anti-assignment clauses, but the assignee must give adequate assurance of future performance — and in shopping centers, the § 365(b)(3) shopping-center conditions apply at the assignment stage.

Section 365(b)(3): shopping-center leases

Shopping-center leases get extra protection because shopping centers function as integrated commercial ecosystems — anchor tenants, co-tenants, common areas, and percentage-rent arrangements interact. A weak assumption or a bad assignee can damage the whole property. Section 365(b)(3) provides that "adequate assurance of future performance" in a shopping-center context means more than the ordinary § 365(b)(1) showing. The five components are:

  1. Source of rent. Adequate assurance of the source of rent and other consideration due under the lease, and, in the case of an assignment, that the assignee’s financial condition and operating performance is similar to that of the debtor at the time it became a tenant.
  2. Percentage rent. Adequate assurance that any percentage rent due under the lease will not decline substantially.
  3. Use, radius, location, and exclusivity. Adequate assurance that assumption or assignment of the lease is subject to all the provisions of the lease, including (but not limited to) provisions governing radius, location, use, or exclusivity, and will not breach substantially any such provision in any other lease, financing agreement, or master agreement relating to the shopping center.
  4. Tenant mix. Adequate assurance that assumption or assignment will not disrupt substantially any tenant mix or balance in the shopping center.
  5. No breach of other agreements. Adequate assurance that the assumption or assignment will not breach any other lease, financing agreement, or master agreement relating to the shopping center.

The shopping-center conditions are not toothless. Use restrictions, radius restrictions, and exclusivity covenants can defeat an otherwise attractive assignment if the proposed assignee would, for example, compete with an existing anchor tenant or violate an exclusive granted to another tenant. Courts have repeatedly enforced use restrictions against bankruptcy assignees over the estate’s objection.

What counts as a "shopping center"? Section 365(b)(3) does not define the term. Courts apply a multi-factor test, looking to common ownership, common parking, common signage, an integrated leasing scheme, a tenant mix that suggests planned synergy, and percentage-rent arrangements. Strip malls and big-box centers usually qualify; a single freestanding store in a multi-store complex without integration generally does not.

Practical sequencing for a retail Chapter 11

  1. Day 1. Verify all lease cure amounts and arrearages; deliver post-petition rent on the first of the following month under § 365(d)(3).
  2. Days 30–60. Categorize locations as go-forward, marginal, and reject candidates. File first-day motion to extend § 365(d)(4) period to the full 210 days.
  3. Days 60–120. Run a sale process where assignment is contemplated; circulate proposed assignment documentation to landlords; engage on § 365(b)(3) shopping-center concerns location by location.
  4. Days 120–180. File omnibus rejection motion for reject-candidate leases. Begin individual contested-assumption hearings on disputed locations.
  5. Days 180–210. Close on assumption / assignment orders. Any lease not the subject of an entered order by Day 210 risks deemed rejection.

Related deep-dive pages