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Legal Memorandum: Limits on Damages for Unexpired Leases

Issue: Under the bankruptcy code, what limits are placed upon a landlord’s ability to recover damages for the unexpired term of the debtor’s lease?

Area of Law: Bankruptcy & Creditors Rights, Real Estate Law
Keywords: Landlord's ability to recover damages; Unexpired lease of the debtor; Limitation
Jurisdiction: Federal
Cited Cases: None
Cited Statutes: 11 U.S.C. § 365(a), § 365(b)(1), § 365(b)(2), 501, § 502(a), § 502(b)(6); Restatement (Second) of Property—Landlord & Tenant § 21.1 (2008)
Date: 06/01/2009

The bankruptcy trustee may, subject to the court’s approval, assume or reject any unexpired lease of the debtor.  11 U.S.C. § 365(a) (2008).  If the lessee has defaulted under the lease, however, the trustee may not assume it unless, at the time of the assumption, the trustee (A) cures the default or provides adequate assurance that the default will be cured; (B) compensates the lessor, or provides adequate assurance that the lessor will be compensated, for any losses arising from the default; and (C) provides adequate assurances of future performance under the lease.  Id. § 365(b)(1).  The right to assume the lease pursuant to § 365(b)(1) does not apply if the default results from the breach of a provision relating to the insolvency of the debtor or the commencement of a bankruptcy case.  Id. § 365(b)(2). 

If the bankruptcy trustee rejects the lease, the landlord, except to the extent the parties to the lease validly agree otherwise, may retake possession of the leased premises, recover rent to the date of the filing of the petition in bankruptcy, recover compensation for the use and occupancy of the leased property by the tenant or his trustee in bankruptcy following the filing of the petition in bankruptcy, and recover damages to the extent allowed by the Bankruptcy Code.  See Restatement (Second) of Property—Landlord & Tenant § 21.1 (2008); 11 U.S.C. § 501. 

In order to recover damages in the bankruptcy case, the lessor must file proof of its claim pursuant to 11 U.S.C. § 501.  […]

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