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Post-Bankruptcy Petition Lease Claims Don't Automatically Result In An Administrative Expense Claim for Unpaid Rent
As we reported in the May issue of Commercial Leasing Law & Strategy, landlords often hold large claims in bankruptcy cases involving commercial real estate when the lease is rejected by the tenant debtor. In these cases, not only are rejection claims unsecured and capped, but, as all unsecured creditors experience, often unsecured claims receive pennies on the dollar. However, the Bankruptcy Code is better for landlords regarding the debtor's lease obligations that arise after the bankruptcy filing until the lease is rejected. The Bankruptcy Code provides that trustees and debtors-in-possession are required to perform all post-petition obligations arising under nonresidential leases, and their failure to do so can be treated as administrative claims, which are paid in full ahead of unsecured claims. That being said, courts disagree on whether these post-petition lease claims automatically result in a per se administrative expense claim for unpaid rent and other lease charges. Given that administrative claims are paid in full before unsecured claims, courts scrutinize administrative expense requests carefully.
This issue was recently addressed by the U.S. Bankruptcy Court for the District of New Jersey in In re Jughandle Brewing, Case No. 23-15703 (CMG) (June 3, 2024). In that case, the court concluded allowance of an administrative expense claim is not automatic and also may not be the sole remedy for a debtor or trustee's failure to perform its post-petition obligations under a commercial lease. The court performed an intensive factual review and legal analysis, and concluded that it had the authority to craft an equitable remedy that balanced the protections afforded commercial landlords under the Bankruptcy Code with the bankruptcy policy of promoting equality of distributions to all creditors. In the end, the court did grant an administrative claim but in a reduced amount.
|Landlord Sought an Administrative Claim for Unpaid Post-Petition Rent
According to the opinion, Jughandle Brewing Company, LLC (debtor) leased real property under a lease dated Aug. 1, 2019 (lease), from Eight Star, LLC (landlord). OceanFirst Bank (bank) held a lien on substantially all of the debtor's assets, most, if not all of which was located at the property. Pursuant to a landlord waiver agreement, the bank was permitted to enter the property to remove collateral without charge for 10 days. After 10 days, the bank was required to pay a fee equal to prorated rent for additional access.
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