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In our previous post, we reviewed recent bankruptcy decisions in regards to trusts and mortgage lenders. In Part 2 of our review of recent bankruptcy decisions made by the court, we bring light to real estate situations between landlords and tenants in a long-term lease.

Commercial Landlords

Commercial landlords frequently enter into long-term leases with their tenants. Unfortunately, sometimes these tenants file for bankruptcy protection.  Under Section 365 of the Bankruptcy Code, tenants can reject unexpired leases if the continuation of the lease presents an impediment to successful reorganization of the tenant.  Section 502(b)(6) limits the landlord’s claim arising from the rejection of a lease.  Section 502(b)(6) limits the landlord’s claim the 15%.  But 15% of what?  Landlords argue that it is 15% of the rent remaining on the lease to take advantage of the fact that rents specified in a lease generally increase over the term of the lease.  Tenants argue that 15% refers to 15% of the term of the remaining term of the lease, beginning when the lease is rejected.  This allows the tenant to take advantage of the lower rent in the earlier years of the lease term and, thereby, reduce the landlords’ claim.  There is a split among the courts on this issue and authority can be found supporting both positions.

The United States Bankruptcy Court for the District of Delaware has issued a recent decision in In re: Filene’s Basement that brings some clarity to this dispute through a thoughtful analysis. The Delaware court came down on the side of landlords, holding that the claim is limited to 15% of the rent due over the remaining term of the lease.  In the view of the Delaware bankruptcy court, this interpretation was closer to the intent of Congress.  However, until clarification of Section 502(b)(6) comes from Congress or the Supreme Court, the rules will vary from jurisdiction to jurisdiction and it will remain important for commercial landlords to know of the rules applicable where they have properties.

As one of the most highly recognized law firms serving Reading, PA, we are well-versed in real estate and bankruptcy cases. To speak with an experienced and skilled real estate attorney in Pennsylvania, schedule an appointment today by dialing 610-370-6700.

**written by Barry W. Sawtelle

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