Rejection Versus Termination: A Sublessee’s Rights in a Lease Rejected in a Bankruptcy Proceeding Under 11 U.S.C. § 365(D)(4)

When a party files for bankruptcy under chapter 11 of the United States Code, the court typically appoints a trustee to handle all of the party’s financial obligations. The trustee’s responsibilities include investigating the financial condition of the debtor, the operation of the business, the desirability of continuing the business, and any other matter relevant to the disposition of the bankrupt estate. If a bankrupt party holds a commercial lease, the trustee possesses two options for dealing with the lease. One option is to reject the lease, which ends the bankrupt party’s obligation to adhere to the provisions of the lease. The trustee may decide to reject the lease because the rent of the property is above the market price or because the particular leased premises are not needed. The second option is to assume the lease, which requires the bankrupt estate to take on the obligations set forth in the lease. The assumption of a lease permits the bankrupt party to receive benefits from the lease, such as the continued use of the property and rent derived from subletting the property, at the cost of meeting its obligations. According to 11 U.S.C. § 365(d)(4) (the “surrender provision”), if the trustee for the bankrupt party fails to either reject or assume the lease within sixty days of filing for bankruptcy, the lease is deemed rejected automatically, and the trustee must immediately surrender the property to the lessor. Chapter 11 also defines the rights of a lessee when its lessor files for bankruptcy and the trustee rejects the lease. Section 365(h)(l)(A)(ii) (the “applicable nonbankruptcy law provision”) states that, in such situations, the lessee possesses the right to remain on the property for the duration of the lease to the extent permitted “by applicable nonbankruptcy law.” In situations involving the subletting of property, the applicable nonbankruptcy law provision suggests that, when a bankrupt lessee or sublessor rejects the original lease, the sublessee of the original lease should also have the right to remain on the premises as permitted by “applicable nonbankruptcy law.”