CHAPTER 9, C. Section 365(d)(3): More Bark or Bite?

• Jurisdiction: United States

C. Section 365(d)(3): More Bark or Bite?

ABI Journal

May 2019

Michael S. Myers

Ballard Spahr LLP

Phoenix, Ariz.

The string of retail bankruptcies over the last several years — from Payless to Toys "R" Us — has implicated the Bankruptcy Code's protections for commercial landlords, most notably §§ 365(d)(3) and 365(d)(4). These statutory provisions, the so-called "Shopping Center Amendments," were added to the Bankruptcy Code in 1984 to remove leases of nonresidential real property from the general rule that a debtor may assume or reject executory contracts at any time prior to confirmation.

Under § 365(d)(4), a debtor tenant must assume or reject an unexpired lease of nonresidential real property within 120 days of the petition date, which period may be extended by an additional 90 days.¹ During this period where the tenant has yet to decide whether to assume or reject a lease, the status of the lease is in limbo, but a landlord is protected by § 365(d)(3), which provides:

The trustee 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....

These statutory provisions are (seemingly) simple and straightforward: A debtor tenant must continue to perform its obligations under the lease — such as paying the rent — as those obligations come due, until the debtor tenant elects to assume or reject the particular lease. However, the Bankruptcy Code does not address the consequences for when the trustee or debtor in possession fails to abide by § 365(d)(3).

What do bankruptcy courts do when a debtor tenant fails to pay rent (or perform some other lease obligation) when it comes due, as required under § 365(d)(3)? One could guess that courts would simply order the debtor to comply with the statute, just as a court may enter an order for a party to comply with a court order. It might be surprising to a landlord client to find that the answer might be "nothing at all," because courts have interpreted the absence of a statutory remedy for noncompliant tenants to mean that they have complete discretion in crafting their own relief. Landlords have found themselves with less-than-satisfac-tory remedies, or no remedy at all, in certain cases — a result that is contrary to the purpose of § 365(d)(3) and in need of amendment.

The Purpose of the Shopping Center Amendments

The text of the Shopping Center Amendments makes it clear that Congress prioritized the performance of commercial lease obligations by tenants in bankruptcy, and the floor statements of then-Sen. Orrin Hatch (R-Utah), a conferee on the originating act, confirm that and explain the basis for this heightened protection for landlords. Sen. Hatch stated:

This subtitle contains three major substantive provisions [that] are intended to remedy serious problems caused shopping centers and their solvent tenants by the administration of the [B]ankruptcy [C]ode.... A second and related problem is that during the time [that] the debtor has vacated space but has not yet decided whether to assume or reject the lease, the trustee has stopped making payments due under the lease.... In this situation, the landlord is forced to provide current services — the use of its property, utilities, security, and other services — without current payment. No other creditor is put in this position. In addition, the other tenants often must increase their common area charge payments to compensate for the trustee's failure to make the required payments for the debtor. The bill would lessen these problems by requiring the trustee to perform all the obligations of the debtor under a lease of nonresidential real property at the time required in the lease. This timely performance requirement will [e]nsure that debtor tenants pay their rent, common area, and other charges on time pending the trustee's assumption or rejection of the lease.²

In short, commercial landlords need the protections of the Shopping Center Amendments because they are involuntary creditors during a pending bankruptcy in a way that other creditors...