By Brandon E. Barker, Geoffrey H. Smith, Megan Preusker & Dormie Ko (Mintz)
This article examines how the US Bankruptcy Code limits landlord claims when a debtor-tenant rejects a commercial lease, an issue growing in importance as corporate bankruptcy filings continue to rise. With companies increasingly using Chapter 11 to shed unprofitable real estate, landlords often face disputes over the scope of recoverable damages following lease rejection.
A key controversy discussed in the article is whether the 15% limitation should be calculated based on the total remaining rent owed over the lease term (the “Rent Approach”) or based on the rent owed during the first 15% of the remaining lease term (the “Time Approach”). The distinction can substantially alter a landlord’s recovery. Although many courts historically favored the Rent Approach, recent cases, most notably a 2024 decision from the Southern District of New York, reflect a shift toward the Time Approach, emphasizing growing national consensus behind that interpretation.
The article also clarifies that not all landlord claims are subject to the statutory cap. Only damages that result directly from lease termination are capped. Claims that would exist regardless of rejection, such as unpaid prepetition rent, are generally excluded. Courts, particularly in the Ninth Circuit, apply a functional test that asks whether the landlord would have the same claim if the lease had been assumed rather than rejected.
Finally, the authors discuss the impact of security deposits and letters of credit. Security deposits typically reduce a landlord’s allowed claim under the cap, and any excess may need to be returned to the debtor. Landlords sometimes attempt to avoid this result by using letters of credit, but courts often treat them as security deposits if the lease language suggests that intent. Careful drafting is therefore critical if landlords wish to preserve the protective value of letters of credit.
The article underscores that while Section 502(b)(6) is a powerful tool for debtor-tenants, its application is complex and highly fact-specific, requiring careful analysis of lease terms, security provisions, and jurisdictional precedent.
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