Glossary

Assumption and Rejection of Leases

Also known as: Lease Assumption and Rejection, Section 365 Assumption or Rejection

The Bankruptcy Code Section 365 mechanism allowing a debtor to elect, for each unexpired lease or other executory contract, to 'assume' it — affirming and continuing the obligation, generally after curing any defaults — or to 'reject' it, treating the debtor's non-performance as a pre-petition breach and freeing the estate from further performance while giving the counterparty a damages claim.

For a CRE landlord-debtor, this election governs whether the estate keeps or sheds individual tenant leases — a debtor-landlord in Chapter 11 may reject a below-market or underperforming tenant's lease in order to re-lease the space on better terms, though the affected tenant retains certain protections under Section 365(h) allowing it to remain in possession despite the rejection. For a CRE tenant-debtor, the same mechanism governs whether the company keeps its stores, offices, or industrial space (assumption) or exits unwanted locations (rejection); a landlord facing rejection of an otherwise valuable lease has essentially no ability to force assumption on the debtor. Assumption requires curing, or providing adequate assurance of prompt cure of, all existing defaults plus adequate assurance of future performance, while rejection is deemed a breach immediately preceding the filing, converting the counterparty's claim into a general unsecured claim — one subject, for a rejected real property lease, to the statutory damages cap under Section 502(b)(6). Debtors generally must decide within a defined statutory window for nonresidential real property leases, and a failure to timely decide is deemed a rejection, which is why lease-heavy CRE bankruptcies move on compressed timelines.