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Pros and Cons of Master Leases
Section 365 of the Bankruptcy Code grants debtors the ability to assume or reject any executory contract or unexpired lease. Debtors must assume or reject a lease in its entirety and are not free under Section 365 to assume only favorable provisions of a lease. See, In re Village Rathskeller, Inc., 147 B.R. 665, 671 (Bankr. S.D.N.Y. 1992). Courts, however, have consistently held that they will not find a multi-property master lease to be a unitary lease merely because such properties are demised in a single document. See, e.g., In re Buffets Holdings, 387 B.R. 115, 120 (Bankr. D. Del. 2008).
In sale-leaseback transactions involving a portfolio of properties, landlords often require that properties be grouped in master leases rather than several individual leases — despite the resulting loss of flexibility for both landlord and tenant — in order to protect against the risk that the tenant can "cherry pick" by rejecting leases for less desirable properties in a bankruptcy.
Debtors in bankruptcy cases frequently challenge the master lease structure and the premise that a master lease agreement is a single, unitary contract that must be assumed or rejected in its entirety. Whether a master lease agreement is unitary or severable is a question of state law. That said, the Bankruptcy Code provides some relevant guardrails, as courts must decline to treat a master lease as a unitary contract if there is no reason for the leases to be integrated beyond the landlord's desire to maximize their recovery in bankruptcy. See, Buffets Holdings, 387 B.R., at 124.
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