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BankruptcyFeaturesCommercial LawLitigationThe Bankruptcy Strategist

Anti-Forfeiture Statute Saves a Debtor's Exercise of Option to Renew Lease

By Barry M. Klayman and Mark E. Felger
March 01, 2018

In a recent decision, Bankruptcy Judge Christopher S. Sontchi addressed the question of whether a Chapter 11 debtor, the tenant under a commercial lease, could exercise an option to renew the lease during the bankruptcy proceedings, even though the debtor was in default under the lease and the lease specified that it could not be renewed if defaults existed at the time the option was exercised.

When the debtor attempted to assume and assign the lease, the landlord argued that the debtor had failed to properly exercise the option because of pre- and post-petition defaults, and as a result, the debtor could only assume and assign the lease to the extent of its remaining term without regard to the option period.

In In re Fresh-G Restaurant Intermediate Holding, Case No. 16-12174 (CSS) (Del. Bankr. Dec. 20, 2017), Judge Sontchi held that the debtor had validly exercised the renewal option, and any defaults that existed at the time the debtor exercised the option did not prevent its right in the option from vesting. Since the lease was subsequently cured of any post-petition defaults and was a vested right, the option could be relieved from forfeiture pursuant to California law, which governed the lease.

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