Things to Remember when your Bankruptcy Sale includes Leases and Con...

Posted by Yosina M. Lissebeck, Esq. on May 22, 2015

Yosina M. Lissebeck, Esq.
Lissebeck Law

So you discovered that great real estate bankruptcy case, where the debtor is selling its real property along with its business operations. You were successful in negotiating a deal for the purchase of the assets and as part of the deal, you want the existing leases and contracts to be transferred. As long as those leases and contracts were not rejected or abandoned by the debtor-in-possession or the trustee during the course of the bankruptcy case – this can easily be done with the sale motion.

Bankruptcy Code § 363 authorizes a debtor-in-possession or trustee, to sell property of the estate other than in the ordinary course of business. A proposed sale of estate property will be approved by the bankruptcy court if it is in the best interests of the estate, based on the facts and history of the case.[1] Under 11 U.S.C. § 365(a), “[a] trustee, subject to the court’s approval, may assume or reject any executory contract or unexpired lease term of the debtor.” Since 11 U.S.C. § 1107(a) gives debtors-in-possession the same rights and powers of a trustee, a debtor-in-possession may also assume an unexpired lease or executory contract.[2]  As long as the leases/contracts are still valid and enforceable – even if they are in default – they can be assumed by the estate and then assigned to the purchaser.  This is usually done in the same motion to approve the sale; however, there are certain conditions that must be met before the bankruptcy court will approve that assumption and assignment.  

In In re Orion Pictures, Corp., the court explained the standard a bankruptcy court should apply on a motion to assume:

[A] bankruptcy court reviewing a trustee’s or debtor-in-possession’s decision to assume or reject an executory contract should examine a contract and the surrounding circumstances and apply its best “business judgment” to determine if it would be beneficial or burdensome to the estate to assume it. [Citation Omitted.] In reviewing a trustee’s or debtor-in-possession’s decision to assume [or reject] an executory contract, then, a bankruptcy court sits as an overseer of the wisdom with which the bankruptcy estate’s property is being managed by the trustee or debtor-in-possession[.][3]

In order for a DIP/Trustee to assume the leases/contracts, the motion must identify the key terms in the leases/contracts including the parties, when made, the use, the term, if there is an option, and of course the monthly rent/payment amount. Further, the motion must state if the leases/contract are current or in default. If there is a default, the DIP/Trustee has to cure it before the bankruptcy court will allow the estate to assume it. As stated above, the bankruptcy court will not approve an assumption if it is burdensome to the estate. Thus, “curing” a default has to be feasible and cannot take away from the benefit the estate will gain from the sale of the assets. Keep this in mind when negotiating your purchase price. There may need to be an “allocation” made toward the cure amounts in the purchaser price to show that this was considered and addressed by the parties.  Finally, once the DIP/Trustee shows that assumption is reasonable, the motion must state that the leases/contracts will be assigned to the purchaser as of the closing date – alleviating any ongoing burden to the estate of any obligations/costs related to those leases/contracts.

Now of course, there may be factual circumstances, local bankruptcy court preferences, and procedural requirements that may differ. Thus, it is always best to contact a bankruptcy practitioner to answer any questions or assist you with the sale process.


[1] In re American West Airlines, 166 B.R. 908, 912 (Bankr. D. Ariz. 1994), citing In re Lionel Corp., 722 F.2d 1063, 1071 (2nd Cir. 1983).
[2] In re Orion Pictures, Corp., 4 F.3d 1095, 1098 (2nd Cir. 1993).
[3] Id. at 1099.


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