A Commercial Landlord's Rights in Bankruptcy

In addition to being good business practice, these concepts are worth noting here, because when they are done properly under state law, the Bankruptcy Code recognizes that the tenant's possessory rights in the real property have been extinguished. See 11 U.S.C. ' 365(c)(3). Specifically, a debtor is not authorized to assume or reject a lease of nonresidential real property where that lease has been terminated pre-petition, and the Bankruptcy Court is without an ability to revive the debtor's rights in the property. As one court aptly stated: 'when a debtor's legal and equitable interests in property are terminated pre-petition, the Bankruptcy Court cannot then cultivate rights where none can grow.' In re DiCamillo, 206 B.R. 64, 71 (Bankr. D.N.J. 1997) (quoting In re Robinson, 54 F.3d 316, 320 (7th Cir. 1995) (citing In re Triangle Labs., Inc., 663 F.2d 463, 468 (3d Cir. 1981)). Because 'there is nothing left for the [debtor] to assume,' the lease never becomes property of the bankruptcy estate. In re Family Kingdom, Inc., 225 B.R. 65, 69 (D.N.J. 1998).

Sometimes, the best result for a landlord is to get possession of the leased premises back quickly so that it may find another tenant and re-rent the space. This is particularly true where the debtor-tenant is liquidating, or it otherwise appears as though distribution through the bankruptcy process will be limited. If the lease was terminated pre-petition as discussed above, a landlord can ' and should ' seek relief from the automatic stay to pursue eviction under state law. Generally, a lease terminated pre-petition constitutes cause for stay relief under section 362(d)(1) of the Bankruptcy Code and at a minimum, a landlord can recover its space through the state courts and replace the debtor tenant. See In re Masterworks, Inc., 94 B.R. 262, 265 (Bankr. D.Conn. 1988) ('It is well settled that where the debtor will be unable to assume a lease pursuant to Code ' 365(a) there is cause for relief from the automatic stay.'); see also In re Nasir, 217 B.R. 995, 997 (Bankr. E.D. Va. 1997) ('a landlord's desire to evict a tenant whose lease has been terminated pre-petition is sufficient cause for the bankruptcy court to grant relief from stay under ' 362(d)(1)'). At a minimum, these measures keep the landlord in the driver's seat and preserve some measure of control after a tenant files for bankruptcy protection.

Payment of Post-Petition Rent

A landlord with an existing, unexpired lease in arrears may move for the entry of an order compelling the debtor to immediately pay post-petition rent under ' 365(d)(3), which requires a tenant-debtor to satisfy its obligations under a lease as the legally enforceable duty. In re Montgomery Ward Holding Corp., 268 F.3d 205, 211 (3d Cir. 2001). Under Bankruptcy Code ' 365(d)(3), the court has an obligation to enforce the terms of nonresidential leases as written. In re Kaber Imaging, Inc., 262 B.R. 187, 189 (Bankr. D.N.H. 2001).

Although ' 365 was intended to shield landlords from its risk of loss in a tenant's bankruptcy filing, see In re Lonuga, 58 B.R. 503, 506 (Bankr. W.D. Wis. 1986), its protection is not complete. In particular, one difficulty with ' 365(d)(3) is the absence of a statutory remedy for a debtor's failure to comply with its terms. The Code provides some consolation to a landlord pending assumption or rejection in section 365(d)(3), which treats post-petition rent under a nonresidential lease of real property as an administrative expense. See, e.g., In re Slim Life Weight Loss Centers, Corp., 182 B.R. 701, 705-06 (Bankr. D.N.J. 1995). As a general matter, this administrative expense is not treated differently from other administrative claims ' it is not afforded 'superpriority' over other like claims. See, e.g., In re Microvideo Learning Systems, Inc., 232 B.R. 602, 607-09 (Bankr. S.D.N.Y. 1999); In re Virginia Packaging Co., Inc., 122 B.R. 491, 495 (Bankr. E.D. Va. 1990) and cases cited. However, at least one court has found otherwise, compelling an administratively insolvent debtor to pay its post-petition rent. See In re Rare Coin Galleries of America, Inc., 72 B.R. 415, 416 (Bankr. D. Mass 1987) (concluding that the Bankruptcy Code 'gives a special administrative claim priority to post-petition rent due under a non-residential lease.')

This issue of timely performance of post-petition payment obligations presents difficulties, however, where an estate is administratively insolvent. In the case of administrative insolvency and no hope of collection in the bankruptcy case, the landlord's best option may be to seek relief from the automatic stay pursuant to Bankruptcy Code ' 362(d)(1) for the debtor's failure to satisfy its obligations under ' 365(d)(3), see In re Rocchio, 125 B.R. 345, 347 (Bankr. D.R.I. 1995) (finding that the debtor's failure to pay post-petition rent and cure its default, provide adequate protection or give adequate assurance of future performance constitutes cause to lift the stay), and avail itself of state court eviction proceedings to quickly recover the leased premises.

Recouping Pre-Petition Arrears

Where a landlord is holding a security deposit, it should move to setoff the pre-petition unpaid rent against that security deposit, pursuant to Bankruptcy Code ' 553. As a general matter, this setoff should be done once the lease rejection damages, measured by Bankruptcy Code ' 502(b)(6), are calculable. Lease rejection damages are calculated under the Bankruptcy Code by examining the rent due under the balance of the lease, without accelerating any payments, for the greater of either: 1) one year; or 2) 15% of the total amount remaining, not to exceed three years following the earlier of either the petition date or the date on which the landlord recovered possession of the property, plus any unpaid rent already due and owing. 11 U.S.C. ' 502(b)(6). The resulting figure is the statutorily capped lease rejection damages.

A landlord is permitted to apply the security deposit against its claim for lease rejection damages because the Bankruptcy Court views the landlord as a secured creditor to the extent of the security deposit. See, e.g., In re Johnson, 215 B.R. 381, 385 (Bankr. N.D. Ill. 1997) (finding that a landlord holding the debtor's security deposit as collateral to ensure future payment is entitled to setoff, and thus is a secured creditor, to the extent of the security deposit); In re Mainstream Access, Inc., 134 B.R. 743, 750 (Bankr. S.D.N.Y. 1991) (holding that the landlord's claim for lease rejection damages was secured to the value of the security deposit). When calculating its lease rejection damages and assuming that the lease provides for payment of these types of expenses, the landlord is entitled to ' and should ' include its out-of-pocket expenses and damages incurred in repairing and maintaining the leased premises. Setoff of these expenses is appropriate, as they are 'the kind of charges for which a security deposit is intended.' In re Brittingham, 39 B.R. 575, 577 (Bank. D. Del. 1984).

Many landlords require that tenants post letters of credit as security for, or a guaranty of, the tenant's payment obligations. This measure can afford a landlord security in the event of bankruptcy because letters of credit and their proceeds are not generally found to be property of the bankruptcy estate. See, e.g., Kellogg v. Blue Quail Energy, Inc. (In re Compton Corp.), 831 F.2d 586, 589 (5th Cir. 1987). Consequently, letters of credit can be used as a tool to secure payment of pre-petition rent. Landlords should be mindful that the letter of credit may not be a perfect remedy and when drawing down on a letter of credit in this context, perhaps the most important question is how much of the pre-petition rent can be recovered?

The answer to this question will vary, depending on the jurisdiction. There is a circuit split regarding whether a landlord may use a letter of credit to circumvent the statutory cap found in Bankruptcy Code ' 502(b)(6). Specifically, Third and Fifth Circuit Courts of Appeals have come to different conclusions on whether a post-petition draw on a letter of credit being held as a security deposit will be subject to the cap; the Ninth Circuit Bankruptcy Appellate Panel has sided with the Third Circuit. Compare In re PPI Enterprises (U.S.), Inc., 324 F.3d 197, 208-10 (3d Cir. 2003) (finding that where a letter of credit is intended as a security deposit, the statutory cap is applicable and a landlord could not use a letter of credit to end-run around the restrictions of ' 502(b)(6)) and In re Mayan Networks Corp., 306 B.R. 295, 300-01 (9th Cir. BAP 2004) (same) with In re Stonebridge Technologies, 430 F.3d 260, 271 (5th Cir. 2005).

The Fifth Circuit's rationale for permitting the landlord to draw down on the letter of credit for an amount in excess of the ' 502(b)(6) cap was that the landlord did not file a proof of claim for its lease rejection damages, thus preserving the independence of the letter of credit from the underlying contract ' in this case, a lease. Stonebridge, 430 F.3d at 269. It reasoned that the landlord's 'need to file a claim against the bankruptcy estate was obviated by the fact that the [tenant's] obligations were substantially secured by cash and a letter of credit, to which the [landlord] turned when the [tenant] defaulted.' Id. The court pointed out that in PPI and Mayan Networks, the landlord filed proofs of claim, which triggered the applicability of ' 502. The Stonebridge Court reasoned that the absence of a proof of claim against the estate entitled the landlord to retain the amount of the letter
of credit draw in excess of the ' 502(b)(6) cap. Id. Further, since the statutory cap did not apply, the court in Stonebridge found that the landlord was able to accelerate its damages as contemplated by the lease in the event of default and use that accelerated figure as its measure of damages. Id. at 273.

Navigating Section 365

One of the principal changes to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ('BAPCPA') that affect the landlord-tenant relationship was the change to ' 365(c)(4), which governs the amount of time a tenant of non-residential real property has to assume or reject the lease. Before the BAPCPA, a tenant's opportunity to extend the time it had to assume or reject was essentially unlimited. Now, a tenant only has a maximum of 210 days to assume or reject the lease (an initial 120 days with one 90-day extension). 11 U.S.C. ' 365(d)(c)(4). Any further extension must be with the prior written consent of the landlord. 11 U.S.C. ' 365(d)(c)(4)(B)(ii). Failure to assume or reject (or secure an extension) within this time frame results in the lease being 'deemed rejected.' 11 U.S.C. ' 365(d)(4)(A).

Assumption and Assignment

Where a lease has been terminated pre-petition, as discussed above, the debtor-tenant is deprived of its possessory rights in the lease and is unable to assume or assign it. As stated earlier, this enables the landlord to maintain some control and protects it from assignment of the lease to a third party.

Where there is no pre-petition termination, a tenant has the option of assuming and assigning the lease available to it. However, BAPCPA implemented another major change relevant to this area in that now, if cure of non-monetary defaults would be impossible, only monetary defaults need be cured in order for the lease to be assumed. 11 U.S.C. ' 365(b)(1). However, if the non-monetary default under the lease arises from the failure to operate, that default must be cured after assumption. Id.

Even leases containing anti-assignment clauses may be assigned under Bankruptcy Code ' 365. Procedurally, the Code requires that an unexpired lease must be assumed before it can be assigned. 11 U.S.C. ' 365(f)(2)(A). In addition, the assignee must provide adequate assurance of future performance, whether or not there has been a default. 11 U.S.C. ' 365(f)(2)(B). See also Cinicola v. Scharffenberger, 248 F.3d 110, 120 (3d Cir. 2001) and In re Wingspread Corp., 145 B.R. 784, 787 (S.D.N.Y. 1992), aff'd. 992 F.2d 319 (2d Cir. 1993). Finally, unless a debtor explicitly assumes a contract, that contract may not subsequently be assigned. See, e.g., In re Univ. Med. Ctr., 973 F.2d 1065, 107, 1079 (3d Cir. 1992) (emphasis added).

Lease Rejection

Bankruptcy Code ' 365 grants to a tenant the statutory right to reject an unexpired lease and, in effect, limit financial exposure of the estate. Rejection triggers the statutory cap on damages contained in ' 502(b)(6), discussed above. However, BAPCPA has changed the damages available in the case of a certain type of lease rejection. Under a new section, 503(b)(7), for nonresidential real property that was previously assumed under ' 365 and subsequently rejected, the damages available to the landlord and are calculated by examining the debtor's lease obligations for a two year period, are afforded administrative expense status. Landlords should be mindful, however, that ' 503(b)(7) makes reference to 502(b)(6), and thus, the statutory cap remains in play.

Conclusion

While the Bankruptcy Code affords landlords a number of tools for use in bankruptcy proceedings, landlords must develop a strategy as soon as possible after the tenant's petition is filed in order to effectively use these tools and maximize recovery.

A. Dennis Terrell is a partner and past vice chairman of the business and finance department of Drinker Biddle & Reath. His practice is devoted exclusively to commercial, creditors' rights and bankruptcy matters, where he represents Trustees, Creditor Committees and Bond Holder Committees and secured and unsecured creditors. Marita E. Cammarano is an associate with the Corporate Restructuring Practice Group of the firm.

Having a tenant in bankruptcy can be one of the most frustrating ' and costly ' experiences that a commercial landlord endures. Although the Bankruptcy Code requires tenants to remain current in payment of their post-petition rent, landlords are often held hostage to the process, stuck with a non-paying tenant in default and a bankruptcy court unwilling to turnover possession of the property. So, what is a landlord to do and how can a landlord maximize its recovery of pre- and post-petition rent in bankruptcy? This article presents the landlord's various options, explore its options and provide guidance on protections and rights that landlords possess.

The Post-Petition Impact of a Pre-Petition Termination of the Lease

Particularly in the current financial climate, it is important for landlords to remain vigilant in collection efforts on a month-to-month basis. Landlords must not permit a tenant to fall far behind and where arrears do accrue (or other defaults exist), landlords should quickly seek payment or eviction in accordance with the lease and applicable state law. An important step in this process is to terminate a lease in accordance with its terms concurrent with the filing of any state eviction proceedings.

In addition to being good business practice, these concepts are worth noting here, because when they are done properly under state law, the Bankruptcy Code recognizes that the tenant's possessory rights in the real property have been extinguished. See 11 U.S.C. ' 365(c)(3). Specifically, a debtor is not authorized to assume or reject a lease of nonresidential real property where that lease has been terminated pre-petition, and the Bankruptcy Court is without an ability to revive the debtor's rights in the property. As one court aptly stated: 'when a debtor's legal and equitable interests in property are terminated pre-petition, the Bankruptcy Court cannot then cultivate rights where none can grow.' In re DiCamillo, 206 B.R. 64, 71 (Bankr. D.N.J. 1997) (quoting In re Robinson, 54 F.3d 316, 320 (7th Cir. 1995) (citing In re Triangle Labs., Inc., 663 F.2d 463, 468 (3d Cir. 1981)). Because 'there is nothing left for the [debtor] to assume,' the lease never becomes property of the bankruptcy estate. In re Family Kingdom, Inc., 225 B.R. 65, 69 (D.N.J. 1998).

Sometimes, the best result for a landlord is to get possession of the leased premises back quickly so that it may find another tenant and re-rent the space. This is particularly true where the debtor-tenant is liquidating, or it otherwise appears as though distribution through the bankruptcy process will be limited. If the lease was terminated pre-petition as discussed above, a landlord can ' and should ' seek relief from the automatic stay to pursue eviction under state law. Generally, a lease terminated pre-petition constitutes cause for stay relief under section 362(d)(1) of the Bankruptcy Code and at a minimum, a landlord can recover its space through the state courts and replace the debtor tenant. See In re Masterworks, Inc., 94 B.R. 262, 265 (Bankr. D.Conn. 1988) ('It is well settled that where the debtor will be unable to assume a lease pursuant to Code ' 365(a) there is cause for relief from the automatic stay.'); see also In re Nasir, 217 B.R. 995, 997 (Bankr. E.D. Va. 1997) ('a landlord's desire to evict a tenant whose lease has been terminated pre-petition is sufficient cause for the bankruptcy court to grant relief from stay under ' 362(d)(1)'). At a minimum, these measures keep the landlord in the driver's seat and preserve some measure of control after a tenant files for bankruptcy protection.

Payment of Post-Petition Rent

A landlord with an existing, unexpired lease in arrears may move for the entry of an order compelling the debtor to immediately pay post-petition rent under ' 365(d)(3), which requires a tenant-debtor to satisfy its obligations under a lease as the legally enforceable duty. In re Montgomery Ward Holding Corp., 268 F.3d 205, 211 (3d Cir. 2001). Under Bankruptcy Code ' 365(d)(3), the court has an obligation to enforce the terms of nonresidential leases as written. In re Kaber Imaging, Inc., 262 B.R. 187, 189 (Bankr. D.N.H. 2001).

Although ' 365 was intended to shield landlords from its risk of loss in a tenant's bankruptcy filing, see In re Lonuga, 58 B.R. 503, 506 (Bankr. W.D. Wis. 1986), its protection is not complete. In particular, one difficulty with ' 365(d)(3) is the absence of a statutory remedy for a debtor's failure to comply with its terms. The Code provides some consolation to a landlord pending assumption or rejection in section 365(d)(3), which treats post-petition rent under a nonresidential lease of real property as an administrative expense. See, e.g., In re Slim Life Weight Loss Centers, Corp., 182 B.R. 701, 705-06 (Bankr. D.N.J. 1995). As a general matter, this administrative expense is not treated differently from other administrative claims ' it is not afforded 'superpriority' over other like claims. See, e.g., In re Microvideo Learning Systems, Inc., 232 B.R. 602, 607-09 (Bankr. S.D.N.Y. 1999); In re Virginia Packaging Co., Inc., 122 B.R. 491, 495 (Bankr. E.D. Va. 1990) and cases cited. However, at least one court has found otherwise, compelling an administratively insolvent debtor to pay its post-petition rent. See In re Rare Coin Galleries of America, Inc., 72 B.R. 415, 416 (Bankr. D. Mass 1987) (concluding that the Bankruptcy Code 'gives a special administrative claim priority to post-petition rent due under a non-residential lease.')

This issue of timely performance of post-petition payment obligations presents difficulties, however, where an estate is administratively insolvent. In the case of administrative insolvency and no hope of collection in the bankruptcy case, the landlord's best option may be to seek relief from the automatic stay pursuant to Bankruptcy Code ' 362(d)(1) for the debtor's failure to satisfy its obligations under ' 365(d)(3), see In re Rocchio, 125 B.R. 345, 347 (Bankr. D.R.I. 1995) (finding that the debtor's failure to pay post-petition rent and cure its default, provide adequate protection or give adequate assurance of future performance constitutes cause to lift the stay), and avail itself of state court eviction proceedings to quickly recover the leased premises.

Recouping Pre-Petition Arrears

Where a landlord is holding a security deposit, it should move to setoff the pre-petition unpaid rent against that security deposit, pursuant to Bankruptcy Code ' 553. As a general matter, this setoff should be done once the lease rejection damages, measured by Bankruptcy Code ' 502(b)(6), are calculable. Lease rejection damages are calculated under the Bankruptcy Code by examining the rent due under the balance of the lease, without accelerating any payments, for the greater of either: 1) one year; or 2) 15% of the total amount remaining, not to exceed three years following the earlier of either the petition date or the date on which the landlord recovered possession of the property, plus any unpaid rent already due and owing. 11 U.S.C. ' 502(b)(6). The resulting figure is the statutorily capped lease rejection damages.

A landlord is permitted to apply the security deposit against its claim for lease rejection damages because the Bankruptcy Court views the landlord as a secured creditor to the extent of the security deposit. See, e.g., In re Johnson, 215 B.R. 381, 385 (Bankr. N.D. Ill. 1997) (finding that a landlord holding the debtor's security deposit as collateral to ensure future payment is entitled to setoff, and thus is a secured creditor, to the extent of the security deposit); In re Mainstream Access, Inc., 134 B.R. 743, 750 (Bankr. S.D.N.Y. 1991) (holding that the landlord's claim for lease rejection damages was secured to the value of the security deposit). When calculating its lease rejection damages and assuming that the lease provides for payment of these types of expenses, the landlord is entitled to ' and should ' include its out-of-pocket expenses and damages incurred in repairing and maintaining the leased premises. Setoff of these expenses is appropriate, as they are 'the kind of charges for which a security deposit is intended.' In re Brittingham, 39 B.R. 575, 577 (Bank. D. Del. 1984).

Many landlords require that tenants post letters of credit as security for, or a guaranty of, the tenant's payment obligations. This measure can afford a landlord security in the event of bankruptcy because letters of credit and their proceeds are not generally found to be property of the bankruptcy estate. See, e.g., Kellogg v. Blue Quail Energy, Inc. (In re Compton Corp.), 831 F.2d 586, 589 (5th Cir. 1987). Consequently, letters of credit can be used as a tool to secure payment of pre-petition rent. Landlords should be mindful that the letter of credit may not be a perfect remedy and when drawing down on a letter of credit in this context, perhaps the most important question is how much of the pre-petition rent can be recovered?

The answer to this question will vary, depending on the jurisdiction. There is a circuit split regarding whether a landlord may use a letter of credit to circumvent the statutory cap found in Bankruptcy Code ' 502(b)(6). Specifically, Third and Fifth Circuit Courts of Appeals have come to different conclusions on whether a post-petition draw on a letter of credit being held as a security deposit will be subject to the cap; the Ninth Circuit Bankruptcy Appellate Panel has sided with the Third Circuit. Compare In re PPI Enterprises (U.S.), Inc., 324 F.3d 197, 208-10 (3d Cir. 2003) (finding that where a letter of credit is intended as a security deposit, the statutory cap is applicable and a landlord could not use a letter of credit to end-run around the restrictions of ' 502(b)(6)) and In re Mayan Networks Corp., 306 B.R. 295, 300-01 (9th Cir. BAP 2004) (same) with In re Stonebridge Technologies, 430 F.3d 260, 271 (5th Cir. 2005).

The Fifth Circuit's rationale for permitting the landlord to draw down on the letter of credit for an amount in excess of the ' 502(b)(6) cap was that the landlord did not file a proof of claim for its lease rejection damages, thus preserving the independence of the letter of credit from the underlying contract ' in this case, a lease. Stonebridge, 430 F.3d at 269. It reasoned that the landlord's 'need to file a claim against the bankruptcy estate was obviated by the fact that the [tenant's] obligations were substantially secured by cash and a letter of credit, to which the [landlord] turned when the [tenant] defaulted.' Id. The court pointed out that in PPI and Mayan Networks, the landlord filed proofs of claim, which triggered the applicability of ' 502. The Stonebridge Court reasoned that the absence of a proof of claim against the estate entitled the landlord to retain the amount of the letter
of credit draw in excess of the ' 502(b)(6) cap. Id. Further, since the statutory cap did not apply, the court in Stonebridge found that the landlord was able to accelerate its damages as contemplated by the lease in the event of default and use that accelerated figure as its measure of damages. Id. at 273.

Navigating Section 365

One of the principal changes to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ('BAPCPA') that affect the landlord-tenant relationship was the change to ' 365(c)(4), which governs the amount of time a tenant of non-residential real property has to assume or reject the lease. Before the BAPCPA, a tenant's opportunity to extend the time it had to assume or reject was essentially unlimited. Now, a tenant only has a maximum of 210 days to assume or reject the lease (an initial 120 days with one 90-day extension). 11 U.S.C. ' 365(d)(c)(4). Any further extension must be with the prior written consent of the landlord. 11 U.S.C. ' 365(d)(c)(4)(B)(ii). Failure to assume or reject (or secure an extension) within this time frame results in the lease being 'deemed rejected.' 11 U.S.C. ' 365(d)(4)(A).

Assumption and Assignment

Where a lease has been terminated pre-petition, as discussed above, the debtor-tenant is deprived of its possessory rights in the lease and is unable to assume or assign it. As stated earlier, this enables the landlord to maintain some control and protects it from assignment of the lease to a third party.

Where there is no pre-petition termination, a tenant has the option of assuming and assigning the lease available to it. However, BAPCPA implemented another major change relevant to this area in that now, if cure of non-monetary defaults would be impossible, only monetary defaults need be cured in order for the lease to be assumed. 11 U.S.C. ' 365(b)(1). However, if the non-monetary default under the lease arises from the failure to operate, that default must be cured after assumption. Id.

Even leases containing anti-assignment clauses may be assigned under Bankruptcy Code ' 365. Procedurally, the Code requires that an unexpired lease must be assumed before it can be assigned. 11 U.S.C. ' 365(f)(2)(A). In addition, the assignee must provide adequate assurance of future performance, whether or not there has been a default. 11 U.S.C. ' 365(f)(2)(B). See also Cinicola v. Scharffenberger , 248 F.3d 110, 120 (3d Cir. 2001) and In re Wingspread Corp . , 145 B.R. 784, 787 (S.D.N.Y. 1992), aff'd . 992 F.2d 319 (2d Cir. 1993). Finally, unless a debtor explicitly assumes a contract, that contract may not subsequently be assigned. See, e.g., In re Univ. Med. Ctr., 973 F.2d 1065, 107, 1079 (3d Cir. 1992) (emphasis added).

Lease Rejection

Bankruptcy Code ' 365 grants to a tenant the statutory right to reject an unexpired lease and, in effect, limit financial exposure of the estate. Rejection triggers the statutory cap on damages contained in ' 502(b)(6), discussed above. However, BAPCPA has changed the damages available in the case of a certain type of lease rejection. Under a new section, 503(b)(7), for nonresidential real property that was previously assumed under ' 365 and subsequently rejected, the damages available to the landlord and are calculated by examining the debtor's lease obligations for a two year period, are afforded administrative expense status. Landlords should be mindful, however, that ' 503(b)(7) makes reference to 502(b)(6), and thus, the statutory cap remains in play.

Conclusion

While the Bankruptcy Code affords landlords a number of tools for use in bankruptcy proceedings, landlords must develop a strategy as soon as possible after the tenant's petition is filed in order to effectively use these tools and maximize recovery.

A. Dennis Terrell is a partner and past vice chairman of the business and finance department of Drinker Biddle & Reath. His practice is devoted exclusively to commercial, creditors' rights and bankruptcy matters, where he represents Trustees, Creditor Committees and Bond Holder Committees and secured and unsecured creditors. Marita E. Cammarano is an associate with the Corporate Restructuring Practice Group of the firm.